Contents

Secondary markets

Euro secondary strengthens

Tone in the European securitisation secondary market continued to strengthen into the last week's close on the back of positive wider markets.

Once again, senior prime assets were the main focus on Friday, albeit with patchy and thin flows on- and off-BWIC. Secondary spreads in autos and UK RMBS held steady, but Dutch RMBS edged a little wider following the pricing of the latest STORM new issue.

There were also a small number of trades in peripherals driven by a mix of buying and selling activity. However, off-the-run paper across the board remains relatively neglected and levels continue to drift.

There is currently only one BWIC on the European schedule for the day. Due at 14:00 London time, the two line list comprises: £4.5m ALBA 2007-1 F and £1.6m NGATE 2006-1 E. Neither UK non-conforming tranche has covered on PriceABS in the past three months.

Secondary markets

Euro secondary similar

Patterns in the European securitisation secondary market remain similar despite the continuing volatility in wider markets.

"It's still pretty quiet and trends are pretty much the same," says one trader. "Broader markets are down again this morning, but little has changed in our space."

The trader continues: "The senior prime sector is still fine and continues to grind tighter. Meanwhile, there is still a real lack of visibility in the UK non-conforming space because of the heightened macro volatility - for example the two line mezz list yesterday DNT'd."

There are currently eight BWICs on the European schedule today. Highlights include a 2.0 CLO mezz list at 14:00 London time and a lower mezz UK non-conforming auction at 14:30.

The eight line €30.429m CLO BWIC comprises: AVOCA 12X E, CGMSE 2014-2X D, CGMSE 2015-1X C, CORDA 5X CNE, HARVT III-X C1, HPARK 1X D, JUBIL 2014-11X E and SPAUL 3X E. Three of the bonds have covered with a price on PriceABS in the past three months - AVOCA 12X E at 95.16 on 28 October; CGMSE 2014-2X D at 90.05 on 19 January; and SPAUL 3X E at 92H on 19 January.

The five line £11.41m UK non-conforming list consists of: CELES 2015-1 F, EMAST 2007-1V E, RLOC 2007-1X E1B, RMS 28 F1 and UROPA 2007-1 B2A. One of the bonds has covered with a price on PriceABS in the past three months - UROPA 2007-1 B2A at L90s on 10 November.

Secondary markets

US CLO surge

The US CLO secondary market is set for a surge in activity today, but wider market volatility may hamper it.

"We're starting to see a bit more activity and there are a decent amount of bid lists out today compared to the past week," says one trader. "Though futures are down again this morning, which won't help."

At the same time, some things remain constant, the trader notes. "We're continuing to see tiering between bonds in respect to energy exposure and manager quality. In the latter case, the more liquid managers, irrespective of how well they have performed, are trading better than the less liquid managers."

However, the trader adds that the current environment is encouraging even deeper scrutiny of available paper. "You have to look into every single bond and look not only into the manager and the energy or mining exposure, but right down to where every loan in the portfolio is trading; what would happen with a downgrade right now; would an OC test be triggered; and so on. So, there's a lot more things to consider, but that also makes the market a lot more interesting."

There are seven US CLO BWICs on the calendar for today so far. The largest of which is a 17 line $83+m current size mix of 1.0 and 2.0 mezz due at 10:00 New York time.

The list consists of: ACIS 2013-2A C2, ARES 2007-12A E, ARES 2007-12X E, AVCLO 2007-5A D2, AVCLO 2007-5X COM3, BATLN 2007-1A E, DENC6 6X B2L, GEMC 2005-8X D1, HARCH 2007-1A E, MOMNT 2007-1X E, NOBHL 2006-1A E, STCLO 2006-5A C2, STCLO 2007-7A C, SYMP 2011-7A F, VENTR 2005-1A D, WASAT 2006-1A C and WITEH 2006-4A D.

Only ACIS 2013-2A C2 has covered on PriceABS in the past three months - at MH98H on 5 November.

Secondary markets

Euro secondary on the up

Activity and pricing levels are on the up in some sectors of the European securitisation secondary market.

Growing positivity in broader markets yesterday helped to stimulate activity across a wider range of ABS/MBS sectors than seen in recent days. Prime assets remain the main focus, with autos and Dutch RMBS, especially STORM paper, being the biggest beneficiaries of buying interest driving secondary spreads tighter.

At the same time, there has been a pick-up in peripheral RMBS, with Spanish paper seeing the greatest improvement yesterday. Equally, CMBS are seeing increasing flows and the bonds appearing on BWIC are trading well.

Meanwhile, CLOs are still mixed with seniors remaining firm in the past couple of sessions, but lower down the stack trading is still hampered by reticence thanks to broader market volatility. Consequently, mezz levels are still as opaque as they were last week.

There are currently two BWICs on the European schedule for today. The first is an eight line 23.03m euro and sterling ABS/MBS mix.

Due at 14:30 London time the list consists of: DFUND 2015-1 A1, DILSK 1 A, GRECA 2011-1 A2, PENAT 5 A2, SIENA 2010-7 A3, SUNRI 2015-3 A1, TAURS 2013-GMF1 A and TURBF 5 B. Six of the bonds have covered with a price on PriceABS in past three months, last doing so as follows: DFUND 2015-1 A1 at 100.3 on 15 January; DILSK 1 A at 99.95 on 11 December; GRECA 2011-1 A2 at 99.06 on 7 January; PENAT 5 A2 at 100.271 on 15 December; SIENA 2010-7 A3 at 99.41 on 7 January; and TAURS 2013-GMF1 A at 100.98 on 22 January.

Then, at 15:00 there is a two line ABS CDO auction involving €4.6m PGAEA 2007-1 A and €4m STNTM I A2. Neither bond has covered on PriceABS in the past three months.

In addition there is a mixed OWIC due by 15:30. It comprises up to €50m each of: CAR 2014-F1V A, CFHL 2015-2 A1, GNKGO 2013-SF1 A, GNKGO 2014-SF1 A, KIMI 3 A and KIMI 4 A.

Secondary markets

Euro secondary keeps positive

The European securitisation secondary market is holding on to the positive tone of the past few sessions.

"Sentiment was a bit better again yesterday, flows in general are improving and prices are going higher on- and off-BWIC," says one trader. "With little primary activity technicals are supportive of secondary, so while global credit remains relatively stable that positive trend could continue."

The sweet spots remain unaltered, the trader says. "Yesterday we saw prime assets and German multifamily up a few cents. At the same time, peripherals also continue to improve - Italian RMBS traded higher on BWIC yesterday and we also traded a few Spanish bonds."

The most notable exception is CLOs. "CLOs remain difficult," says the trader. "There is still no clue coming from primary - the much-anticipated Blackrock deal still seems to be a way off - and in secondary, even though the BWIC pace has slowed a little, we continue to almost exclusively see sellers."

There are currently four BWICs on the European schedule for today. The chunkiest is a triple-B 2.0 CLO BWIC due at 15:30 London time.

The €31.5m six line auction comprises: CADOG 6X D1, CORDA 5X D, CRNCL 2015-5X D, GROSV 2015-1X C, HARVT 12X D and JUBIL 2015-15X D. Two of the bonds have covered with a price on PriceABS in the past three months - CADOG 6X D1 at 93.6 on 4 November and CRNCL 2015-5X D at 93H on 19 January.

Secondary markets

US CLOs seek clarity

The US CLO secondary market is still struggling for price clarity.

"We are seeing some secondary trading, but certainly not a lot of colour from it," says one trader. "Also, a few new deals are supposedly due to price this week, but it's getting late for that to happen. So, overall, the CLO market is struggling for definition."

Nevertheless, there is both supply and potential demand in secondary, the trader suggests. "TRACE volumes are very much on the lighter side, but there is a fair amount out to bid this week. At the same time, there is undoubtedly money on the sidelines waiting to be implemented, especially now that spreads have widened to the extent that there are bargains to be had, particularly in mezz."

However, the trader adds: "My sense is that investors will hold out a little longer. It seems they're waiting for the dust to settle a bit more on this current bout of volatility to be sure there isn't another wave about to come."

There are currently five US CLO BWICs on the calendar for today, albeit many line items are in small size and the lists are relatively short. The largest slice in for the bid comes in the form of a single $10m line of OCT23 2015-1A SUB due at 9:30 New York time, which has not covered on PriceABS before.

Another highlight, is a six line 2.0 double-A BWIC due at 11:00. It involves $1m each of: CGMS 2014-3A A2, DRSLF 2014-33A B, OAKC 2013-8A B, OCT21 2014-1A A2 and OZLM 2014-7A A2A. Only CGMS 2014-3A A2 has covered with a price on PriceABS in the past three months at 98.67 on 5 November.

Secondary markets

Euro secondary sees more of the same

It was a case of more of the same in the European securitisation secondary market yesterday.

Flows dried up a little yesterday, but the market remained relatively stable and saw a continuation of recent trading patterns. Dutch RMBS spreads edged in a little further and buying interest continued to be seen in peripherals, especially Spanish bonds.

At the same time, CLOs are still struggling with little useful colour being released on yesterday's BWICs, once more. However, price guidance has now been released on the new Blackrock deal, which may begin to provide some direction for secondary.

There are currently two BWICs on today's European schedule. At 14:00 London time there is a six line €5.5m 2.0 CLO mezz list, which comprises: AVOCA 10X E, AVOCA 11X E, AVOCA 15X E, CORDA 3X E, CORDA 5X E and DRYD 2015-39X E. Only CORDA 3X E has covered with a price on PriceABS in the past three months - at 90.67 on 15 December.

At 15:00 is four line mix of RMBS seniors - €11m DOLPH 2013-2 A, £53.691m GFUND 2012-1 A, €9.655m HMI 2011-1X A4 and €8m STORM 2012-4 A2. Three of the bonds have covered with a price on PriceABS in the past three months - DOLPH 2013-2 A at 101.461 on 15 January; GFUND 2012-1 A at 100.405 on 7 January; and HMI 2011-1X A4 at 100.5 on 3 November.

ABS

Eurotunnel refi expected

Eurotunnel has reported strong revenue growth, increasing the likelihood that it will refinance its Channel Link Enterprises Finance (CLEF) A3 and A4 bonds before year-end. The deal's euro liquidity notes appear particularly attractive.

Eurotunnel experienced revenue growth across all of its business segments last year. Shuttle services growth was 10%, railway networks growth was 5% and Europorte growth was 15%.

While the terrorist attacks in Paris affected the fixed link negatively - pushing car shuttles down 8% and Eurostar passenger numbers down 6% - Barclays analysts note that the Calais-Folkestone market has set a new daily record for tourist vehicles since the start of the year, while the new London-Amsterdam route should also provide volume growth.

Rail freight volumes were down 41% in 4Q15 as a result of migrant pressure on the SNCF Reseau yard at Calais-Frethun, but security has since been strengthened. "We think the revenue outlook for FY16 is positive, with ongoing strength in the UK economy, recovery in continental Europe, the impact of additional routes being added and the extra security measures, which should reduce incidents of migrant disruption," say the analysts.

Eurotunnel made structural changes to CLEF over the Christmas period in preparation for a refinancing, suggesting it is a matter of when - rather than whether - the A3 and A4 bonds are refinanced. Ambac and FGIC were removed from wrapping the bonds and changes were also made to the authorised investment list in which the total return swap counterparty may invest, thereby providing greater flexibility for the total return swap provider - although this was mitigated by increasing overcollateralisation as the rating reduces.

The Barclays analysts expect that weak current market sentiment will cause Eurotunnel to wait for improvements before announcing the refinancing of the A3 and A4 bonds, which currently pay a margin of Libor plus 325bp. The timing of the move is expected to take place before the end of the year.

"A refinancing of the A3 and A4 bonds would also likely lead to a partial prepayment of the liquidity notes. We estimate the prepayment would be circa 40% for the euro liquidity notes and circa 10% for the sterling liquidity notes. The euro liquidity notes - assuming a 37% prepayment at the next IPD - would yield 18% to maturity and, as a result, look attractive based on their risk profile (senior to the bonds in the post enforcement waterfall)," the analysts comment.

JL

ABS

Reg AB-compliant deals emerge

Four ABS sponsors - Ally, AmeriCredit, Discover and Ford - have completed Reg AB 2-compliant transactions so far this year. The new regulation went into effect in November and Ford was the first to issue a compliant deal, FORDO 2015-C (SCI 21 September 2015).

Clayton Fixed Income Services is the asset representations reviewer on the newly printed AMCAR, FORDO and ALLYA deals, while FTI Consulting is the reviewer on DCENT. JPMorgan ABS analysts note that the asset representations review (ARR) is limited to specific tests set by the sponsor for the representations of delinquent loans and not for the purpose of reviewing underwriting, credit quality, servicing or establishing cause, materiality or recourse.

"ARR is triggered upon breach of first a delinquency trigger, then also a bondholder vote. While delinquency triggers are issuer-specific, the industry seems to be in agreement on a 5% bondholder (of principal amount outstanding) threshold on the voting trigger," they explain.

ARR delinquency triggers are generally well above historical experience, according to the JPMorgan analysts. For example, Discover set the 60-plus delinquency trigger at 8%. Since 2007 through 2015, the peak 60-plus rate was in November 2009 at 4.18%.

Discover states that the 8% delinquency trigger aligns with the level that DCENT class A bonds can withstand for an extended period of time without incurring a loss.

"It is highly unlikely that ARR in these transactions will come into play, given the extreme delinquency thresholds. However, should the unimaginable happen, investors may benefit from additional testing from an independent third party on the asset representations," the analysts observe.

Meanwhile, the more extensive new auto loan-level data disclosure requirement under Reg AB 2 is due to take effect on 23 November. Loan-level disclosure requirements for other ABS asset classes remain under development and are yet to be finalised by the US SEC.

CS

Structured Finance

SCI Start the Week - 25 January

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

Pipeline
ABS deals accounted for more than half of last week's pipeline additions. There were six new ABS announced, as well as two RMBS and three CMBS.

The ABS were: CNY1.31bn Autopia China 2016-1 Retail Auto Mortgage Loan Securitization Trust; US$1.14bn CarMax Auto Owner Trust 2016-1; €666m Driver Espana Three; Golden Credit Card Trust Series 2016-2; US$604.42m Hyundai Auto Lease Securitization Trust 2016-A; and US$488m Navient Private Education Loan Trust 2016-A.

Friary No.3 and STORM 2016-I were the two RMBS. The CMBS were US$936.4m CSAIL 2016-C5, US$585m JPMCC 2016-ATRM and US$220m Morgan Stanley Capital I Trust 2016-PSQ.

Pricings
Several deals priced, including nine ABS. Additionally there were two ILS, two RMBS, a CMBS and three CLOs.

The ABS were:US$110.25m ACAR 2016-1; US$795.3m Ally Auto Receivables Trust 2016-1; US$1bn Discover Card Execution Note Trust 2016-1; US$752m Drive Auto Receivables Trust 2016-A; US$1.05bn Ford Credit Auto Owner Trust 2016-A; US$625m-equivalent Golden Credit Card Trust Series 2016-1; €1.47bn Siena Lease 2016-2; US$161.75m United Auto Credit Securitization Trust 2016-1; and US$663m Volvo Financial Equipment Series 2016-1.

US$300m Galileo Re 2016-1 and US$200m Vitality Re VII were the ILS, while the RMBS were RUB2.5bn CJSC Mortgage Agent AkBars and US$475m LSTAR 2016-1. The CMBS was US$703.6m CFCRE 2016-C3 and the CLOs were €414m Arbour CLO III, US$407m Babson CLO 2016-I and US$419m Voya CLO 2016-1.

Markets
The US ABS market is witnessing a strong up-in-quality trend, note Citi analysts. They say: "The swift pricing of several large prime auto ABS deals [last] week and large oversubscription levels evidence the up-in quality market bias, corroborated by secondary market trading trends. Similarly, on-the-run subprime auto attracted more focus than comparable off-the-run shelves."

European ABS and RMBS spreads moved out across all segments last week. "Generically, UK Prime RMBS seniors added 2bp to stand in the mid-50s. Meanwhile, its nearest peer, Dutch RMBS seniors, remains anchored at 27bp and 38bp (two-year and five-year WALs respectively)," comment JPMorgan analysts.

Editor's picks
Vulcan CMBS prospects eyed: The EuroCastle Office Portfolio in Vulcan (ELoC28) has been sold at a level sufficient to repay the securitised loan in full. Progress on the other loans securitised in the deal suggests that the class F and class G notes will suffer total losses...
Euro CLOs suffer: The European CLO secondary market is suffering under heavy selling pressure. "Activity is almost entirely driven by selling from accounts," says one trader. "The only demand we are seeing is for short-dated bonds and there is none whatsoever for 2.0 paper."...

Deal news
• Hudson Valley Mall is set to lose another anchor chain when Macy's closes shop in April 2016. Kroll Bond Rating Agency warns that the regional shopping mall in Kingston, New York, is exposed to the 'debilitating effects' of co-tenancy clauses. The shopping mall backs US$49.6m (12.8%) of pooled debt in CFCRE 2011-C1.
• ISDA's Determinations Committee will reconvene on 19 January to further discuss the Novo Banco potential credit event. The Committee failed to reach a conclusion last week over the conundrum and subsequently sent the process to external review (SCI 14 January).

Regulatory update
• Representatives from Kaye Scholer, Fundation Group and PeerIQ recently discussed the impact of heightened regulatory scrutiny on the US marketplace lending industry during a live webinar hosted by SCI (view the webinar here).
• The FHFA has released a final rule which amends its guidelines for Federal Home Loan Bank (FHLB) membership. The rule adds to the woes of leveraged RMBS investors by excluding captive insurers from the list of entities eligible for FHLB membership.
• The EBA has launched a consultation regarding its guidelines on implicit support for securitisation transactions. The guidelines were drafted to provide clarity on what constitutes 'arm's length conditions' and when a transaction is not structured to provide support for securitisations.
• The Canadian Securities Administrators (CSA) is seeking comment on its proposed approach to OTC derivatives. It has set out certain requirements for the treatment of customer collateral, record-keeping and disclosure for clearing intermediaries and regulated clearing agencies.
• Ocwen has settled US SEC charges that it misstated financial results by using a flawed and undisclosed methodology to value complex mortgage assets. Ocwen has made a string of settlements (SCI passim) and under this latest one will pay the SEC a US$2m penalty.

CDS

Antitrust settlement progressing

A distribution plan has been released in connection with the CDS antitrust settlement agreed last year involving a dozen banks, ISDA and Markit (SCI 15 September 2015). In addition, a 'fairness hearing' is scheduled for 15 April, to approve the proposed settlement.

If approved, potential claimants may submit a claim by 27 May, after which a settlement distribution for each qualifying claimant will be calculated and distributed. The distribution plan involves four steps, according to a recent NewOak memo.

The first step is to identify a 'covered transaction' within the scope of the settlement. To qualify as a covered transaction, the claimant must prove that it purchased or sold CDS protection with one of the defendant banks between 1 January 2008 and 25 September 2015 and that the transaction was covered by US antitrust laws.

The plan suggests that class members will have the opportunity to submit additional transactions and information for consideration as well.

A CDS transaction is defined as including assignments, novations, unwinds, terminations or other exercises of rights or options with respect to any CDS. Any decision to withhold a bid or offer on, or to decline to purchase, sell, trade, assign, novate, unwind, terminate or otherwise exercise any rights or options with respect to any CDS is also included in the definition. The NewOak memo consequently questions whether the distribution plan contemplates compensating claimants who decided not to bid or accept a bid on a CDS.

The second step of the distribution plan is to submit a proof of claim via a dedicated settlement website. Alternatively, a class member can choose to opt out of the settlement and pursue their own legal remedies directly against the defendants.

Step three is to calculate 'spread inflation', which is designed to account for the amount by which bid-ask spreads would have compressed, absent the alleged antitrust behaviour of the defendants. Once a proof of claim form has been submitted, class members will be directed to a website that provides DTCC transaction data on and the amount of the allowed claim for each covered transaction.

The allowed claim is calculated based on the bid-ask spread for each covered transaction. The memo notes that the spread appears to have been calculated by identifying the narrowest bid-ask spread within each hour and then averaging them across all hours within a trading day to establish an average spread for a given reference entity and tenor on a given trading day.

"One question worth examining is to what extent this estimated bid-ask spread accounted for the impact of notional. Another question worth examining is whether this method discriminates against settlement class members, who were particularly active only at certain times of the day, especially during days of high market volatility," the memo adds.

A factor of 20% will then be applied to the estimated bid-ask spread to account for spread inflation. However, it is unclear why a constant factor should be applied when some covered transactions may have experienced more compression than others.

Under the final step, spread inflation is aggregated for each class member that submits a claim. Each applicant will then be entitled to receive a pro-rata share of the net settlement, which will be determined by multiplying the net settlement by the percentage to which each class member's aggregate spread inflation bears to the aggregate spread inflation of all class members that submitted claims.

CS

CLOs

Energy stress surging

The beginning of 2016 has seen a number of stressed loan issuers - particularly in the oil and gas sector - moving closer to potential default. Wells Fargo CLO strategists highlight five recently troubled names, which account for US$1.4bn in US CLO collateral, or 0.33% of the outstanding US CLO universe.

Earlier this month, Southcross Energy Partners - which represents the biggest exposure of the five names, at US$507m - suspended quarterly cash distributions and retained Kirkland & Ellis and Houlihan Lokey to advise on "potential strategic alternatives". Seventy Seven Energy is another stressed name highlighted by the Wells Fargo strategists: it has retained Lazard Freres & Co to assist in restructuring its debt.

Meanwhile, Paragon Offshore has deferred an interest payment due on its senior unsecured notes. There is a 30-day grace period before an event of default occurs, during which time the company intends to discuss capital structure alternatives with its debtholders.

Verso Corp is also seeking to restructure its balance sheet to address the firm's "continuing cashflow and liquidity concerns", while Arch Coal filed for Chapter 11 bankruptcy protection on 13 January. The median US CLO exposure to these combined five issuers is 0.55%, according to the strategists.

Of the 434 deals with exposure to any of these five issuers, only 98 have exposure of at least 1% to the issuers combined. By vintage, 46.6% of total US CLO exposure to the issuers is in the 2014 vintage; 20.1% is in the 2013 vintage. Deals issued last year represent 13.1% of the total US CLO exposure to these issuers.

As of year-end 2015, CLOs held 1.2% in defaulted assets. For context, LCD figures put the volume weighted default rate at 1.5% at end-2015.

Moody's last week placed on review for downgrade the ratings of a number of exploration and production (E&P) and oilfield services (OFS) companies, reflecting its expectation that their credit quality will continue to decline along with oil prices. The affected companies are common holdings in CLO 2.0 deals and together appear in 447 deals rated by the agency, with an average exposure of 1.55%. Of these names, 14 are widely held in CLO 2.0s and also have depressed loan prices, as well as only adequate or weak liquidity.

Among the US CLO 2.0s rated by Moody's, seven - Crown Point CLO II, ECP CLO 2012-4, Mountain View CLO 2014-1, Silvermore CLO, Silver Spring CLO, Telos CLO 2014-5 and Telos CLO 2014-6 - have exposures of 5% or more to the E&P and OFS companies placed on review for downgrade. The agency notes that the weakening industry fundamentals and operating environment for E&P and OFS companies will erode weighted average rating factors, increase potential par losses and lower overcollateralisation ratios in affected CLOs, if issuers default or CLO managers sell their loans at discounted prices. Rating downgrades to Caa1 or lower are also likely to pressure excess limits on Caa holdings.

Oil prices recently dropped below US$30 per barrel, a 12-year low. Moody's suggests that most E&P companies cannot internally fund sustaining levels of capital spending at these prices and would likely have trouble accessing capital markets.

The agency's oil and gas liquidity-stress index decreased to 21.4% in mid-January, from 19.6% in December, and is approaching its record high of 24.5% from March 2009.

CS

CMBS

Court rules against Canary Wharf

Canary Wharf Group sold 10 Upper Bank Street for £790m in June 2014 and used the proceeds to prepay £578m of the class A1 fixed-rate notes of its CMBS at par (SCI 2 July 2014). The spens amount of £169m was placed in an escrow account to be paid to either the class A1 bondholders or Canary Wharf Group, depending on a court decision (see SCI's CMBS loan events database), which was eventually reached this week.

The High Court has found unequivocally in favour of the class A1 noteholders. The spens payment is therefore due not only in this instance, but also in any analogous future circumstance.

The judge found against Canary Wharf "both as a matter of the language of the relevant provisions and on the basis of the commercial sense of those provisions and of the transaction as a whole". The judge found the language to be "clear and unambiguous" and said "it would make a nonsense of the structure if the issuer could redeem at par at any time".

The premium payable to bondholders is £168.7m plus interest accrued at 6.455%, which Barclays analysts calculate will be between £17m and £20m - depending on factors such as whether it is simple or compound interest - should Canary Wharf pay next month. Canary Wharf Group has applied for permission to appeal, although extending the time that interest is allowed to accrue could prove too expensive to risk taking up any appeal option.

Pricing before the judgement was 132bp for the A1 notes and the value of the bonds including spens and accrued interest is 182bp. Uncertainty over any potential appeal should result in a current valuation around the 160bp mark, reckon the Barclays analysts.

"The class A3 and B bond prices have also suffered as a consequence of the court case and, with pricing before the appeal at 123bp and 125bp respectively, we expect fundamental value to be 134bp and 135bp - which is around 10 points upside. Again, while there is uncertainty over the appeal, we would expect bonds to recover roughly half of this differential," the analysts note.

The case also has implications for other securitisations. First, the case shows there is a clear indication that bondholders expect spens in matters within borrowers' control or fault.

Second, after receiving disposal proceeds, an automatic prepayment mechanism is not a mandatory prepayment. Canary Wharf had argued that it was a mandatory prepayment because after the property disposal proceeds had been received by the borrower, there was an automatic prepayment of the intercompany loan. But the judge ruled that "while the borrower may be obliged to use the proceeds to make a prepayment, the obligation is to use them to make a prepayment under the intercompany loan agreement that it has already elected to effect, not one it was contractually bound to make".

Thirdly, the case shows that a premium is payable not only where there is a voluntary prepayment, but also if sums are prepaid following enforcement of security against the borrower. The Barclays analysts note that, if this is the case, mezzanine and junior fixed rate recoveries could be negatively affected post enforcement.

Additionally, because underlying documentation is not always reasonably available to investors, Canary Wharf's assertion that the offering circular was not admissible as evidence was not ruled on. However, the analysts believe that the courts should be able to rely on the offering circular.

JL

NPLs

NPL guarantee hailed

The Italian government is set to introduce rules establishing a guarantee mechanism, dubbed Garanzia Cartolarizzazione Sofferenze (GACS), to facilitate the transfer of non-performing loans from the books of commercial banks to securitisation vehicles. The move has been welcomed as a positive step towards clearing the country's overhang of NPLs, but uncertainty remains over the transfer prices to be used.

Under the scheme, only senior tranches of securitisations shall be guaranteed, with junior and mezzanine tranches only being repaid once the senior tranches guaranteed by the state have been fully repaid. The guarantee will only be issued after the securities have received a rating equal to or higher than investment grade from an independent rating agency included in the list of credit rating agencies accepted by the Eurosystem. Banks shall be required to entrust credit recovery to an external independent servicer.

Guarantees may be requested by banks that securitise and sell their NPLs, in return for regular fee payments to the Italian Treasury, calculated as a yearly percentage of the amount guaranteed. The price of the guarantee is a market price, as recognised by the European Commission, which has confirmed that the scheme does not involve any state aid. The price shall be calculated using single name CDS related to Italian issuers, with a risk level equal to that of the guaranteed securities.

Specifically, the price will be based on a basket of single name CDS referencing all Italian companies that are rated by S&P, Fitch or Moody's at: BBB/Baa2, BBB-/Baa3 or BB+/Ba1, if the rating of the senior tranche is BBB-/Baa1, BBB+/Baa1 or BBB/Baa2; BBB-/Baa3, if the rating of the senior tranche is BBB/Baa2; or BBB/Baa2, BBB+/Baa1 or A-, if the rating of the senior tranche is BBB+/Baa1.The basket composition will be fixed at the time of the approval of the scheme for the duration of the scheme; a company will leave the basket if its rating changes so that it falls outside the ratings represented in the basket.

For each constituent in the benchmark basket, the average over the last six months of mid-prices at the time of the transaction is taken from Bloomberg's default database. Then a simple average is taken to arrive at the benchmark value.

The price will increase in time to account for the higher risk associated with longer duration of the bonds and to incorporate into the scheme a strong incentive for an early recovery of the credit. The price for the first three years is calculated as an average of the mid-price of three-year benchmark CDS for issuers with a rating equal to that of the guaranteed tranches. In years four and five, the price will increase (based on the five-year CDS price) and an incentivising premium will be paid to offset the lower rate paid for the first three years.

From the sixth year onwards the guarantee will be fully priced (based on the seven-year CDS price). In years six and seven, an additional incentivising premium will be paid to offset the lower rate paid for the first five years.

The calculations are made on the assumptions of a discount rate of 2% and a linear repayment schedule of the senior tranche to be fully paid off after year seven.

The transfer price of NPLs appears to have been the main obstacle to establishing a 'bad bank' in Italy. A sale price of 20%-30% of an NPL's notional value has reportedly been mooted in negotiations between the Italian Ministry of Economy and Finance and the European Commission.

CS

Capital Relief Trades

Synthetic disorder

Risk transfer deals seek regulatory breakthrough

Panellists at SCI's inaugural capital relief trades conference last month discussed regulatory developments in the sector and the push towards accommodating synthetic securitisations under the new umbrella of standardisation. However, doubts persist over the viability of harmonisation in such a diverse market.

"The capital requirements regulation (CRR) has made some good progress with addressing harmonisation in detail, but there still needs to be a greater recognition for the distinctive differences among European jurisdictions," said Carlo de Donato, director of strategic risk solutions at Citi. "Trying to harmonise for the perfect trade is just simply impossible."

The EBA has already set out it own guidelines on significant risk transfer, with the goal of eliminating differences on a national supervisory level. But the independent jurisdictional mandates set out by national regulators have proven challenging. As a result, the EBA has been communicating with the market, in an attempt to identify an optimum framework.

"There are discussions ongoing between the EBA and multiple bodies about time calls, replenishment and other key factors - all of which are essential to risk transfer," added de Donato. "The more advanced regulatory models among European countries will need less treatment, but even these will still face certain tests too."

He continued: "There will be some problematic sticking points with certain regulators; one example being the resolution directive in bankruptcy. Countries like the UK and Italy don't like to apply the servicer terminating structure in the case of a CDS default like other European countries, so how would these distinctions be treated?"

A key development in the move to harmonisation was the European Commission's announcement last year of a Capital Markets Union (SCI 30 September). The plan proposed criteria for simple, transparent and standardised (STS) securitisation, but is not necessarily beneficial to risk transfers.

"I understand the motive behind STS, but I don't think it will achieve much. It is too opaque and doesn't consider the different jurisdiction, asset classes and investors," said Rasheed Saleuddin, portfolio manager at West Face Capital. "Perhaps more importantly, it is also meant to be capital efficient, but it's unlikely that it will actually help credit risk transfers at all."

This is because synthetic securitisations - a popular risk transfer structure - have been deemed by regulators to be ineligible for the STS framework (SCI passim). There are concerns that such an attitude will reinforce the stigma of synthetics by marking them out from deals labelled as higher quality.

"The positive is that the EBA recently sent out a letter signalling that is still considering synthetics within STS," said Kaiko Kakalia, cio of Chorus Capital. Indeed, the EBA has recently shown its support at least for a limited extension of the prudential treatment granted to STS to banks that originate and retain certain SME balance sheet synthetic securitisation positions. Other considerations for extensions could follow.

In contrast, the Basel Committee has stated that it will not consider synthetics in its own simple, transparent and comparable (STC) framework. However, even if synthetics are reconsidered down the line, the limbo created by differing regulatory approaches seems to be affecting potential issuance.

"I haven't seen a standardised bank come up with a synthetic transaction yet," added Kakalia. "The risk weight charge is clearly higher when you have a retained senior single-A tranche at 50%. It looks extremely expensive when contrastingly a bank that goes by an internal ratings-based (IRB) approach is getting the same opportunity at risk weight of 10-12%."

Nonetheless, the expectation is that the high risk weighted costs are unlikely to be resolved in the foreseeable future. "We are probably going to have to wait until Basel 4, whenever that does come out. It's obviously unknown what the risk weights will be, but this should create a clearer direction," said Romain Brive, director of global structured credit and solutions at Natixis. "Even then, I'm still not convinced that synthetics will make sense for standardised banks."

However, Reed Smith partner Claude Brown believes that if the regulators can address certain anomalies, standardised banks may see some opportunity. "What originators will ultimately need is a good, rated portfolio where there is going to be a difference between real risk and capital requirements. This is the arbitrage they must tackle," he said. "But the regulators must first overcome their scepticism that standardised banks can use risk trades to release capital."

For now, the panellists don't expect much movement to be made by standardised banks. On the other hand, IRB banks are expected to continue execute synthetics this year. The only part that remains unclear is just how many are launched.

"It will probably range somewhere between 15 and 25," said Kakalia. "It's hard to pin down because this market is not fully transparent."

Brown, however, pointed out that there is more to consider than just the beginning of the trade. "You have to remember that a lot of trades morph too. Where these deals start and finish often change over time."

JA

Structured Finance

Goldman alumni join forces

Former Och-Ziff Capital Management partner Antonio Batista and ex-Goldman Sachs md William Douglas have teamed up to found Caius Capital, a London-based distressed credit hedge fund. Both partners, the pair take on the roles of cio and coo respectively at the new shop.

Batista joined Och-Ziff in 2004 and was most recently portfolio manager for European distressed credit at the firm. He had previously been an associate in the M&A unit at Goldman Sachs.

Douglas spent 12 years at Goldman and was most recently head of its prime brokerage team.

Structured Finance

Private asset head hired

Nicholas Bamber has joined Legal & General Investment Management (LGIM) in the newly created role of head of private assets, reporting to LGIM head of investment Aaron Meder. Bamber arrives from RBS, where he headed the bank's corporate coverage in the UK.

According to Meder, Bamber will focus initially on European private placements, but look to build a global business across currencies and asset classes in the long term. His experience ranges across a wide spectrum in capital markets, including structured finance and credit derivatives.

Structured Finance

New shop for Oaktree duo

Adams Street Partners has appointed Bill Sacher and Shahab Rashid to build a private credit platform, which will focus on a broad array of opportunities in credit alternatives on a global basis. The pair will lead the firm's credit capabilities from its new Manhattan office.

Sacher has been named partner and head of private credit at Adams Street and brings over 28 years of experience within the leveraged debt markets. Previously, he headed and was the portfolio manager of Oaktree Capital Management's mezzanine debt funds. Prior to that, Sacher served as the co-head of both the leveraged finance origination team and the high yield capital markets group at JPMorgan.

Rashid becomes partner at Adams Street and co-founder of the private credit team. He also joins from Oaktree Capital Management, where he served as md and deal team head within the mezzanine debt group. Prior to Oaktree, Rashid was a member of the leveraged finance group at Salomon Smith Barney/Citigroup.

Structured Finance

AIG overhauls structure

AIG has announced a series of strategic actions and organisational changes designed to create a leaner, more profitable and focused insurer. The plan includes an IPO for a portion of United Guaranty Corporation (UGC), the divestiture of AIG Advisor Group and the creation of a new legacy portfolio to hold non-strategic assets.

AIG says it will pursue an initial public offering of UGC in mid-2016 to sell up to 19.9% of the outstanding shares, subject to regulatory and GSE approval, as a first step towards a full separation between the companies. Meanwhile, AIG Advisor Group has been sold to Lightyear Capital and PSP Investments. The transaction is expected to close in 2Q16.

Charlie Shamieh has been appointed legacy ceo, heading up the legacy portfolio composed of non-strategic assets and businesses that AIG intends to exit or run off. The insurer expects the portfolio to be managed in order to monetise assets in a timely manner and return capital to shareholders.

The organisational changes will also see the creation of nine modular business units with greater end-to-end accountability, each with its own specific financial metrics. The aim is to provide AIG with options to retain and grow the businesses, or take public/sell the units if they don't adequately contribute to financial targets or if it becomes apparent that they are worth more outside of the insurer than within.

Within AIG's commercial segment, the modular business units will be: liability and financial lines; property and special risks; US commercial; and Europe commercial. Inside the consumer segment, the modular units will be: US individual retirement; US group retirement; life, health and disability; personal insurance (P&C); and Japan. The separation of even the larger modular units of its commercial and consumer segments could be considered over time, with utilisation of deferred tax assets, contingent on improvements in the credit risk profile and operating performance.

Structured Finance

Structured credit vets branch out

Dean Atkins and Ian Robinson have been named co-heads of 400 Capital Management Europe, the new London-based unit of 400 Capital Management. Their focus will be on managing European structured credit and securitised assets.

The pair are former co-ceos of Kinson Capital, a fixed income advisory and asset management boutique, and have previously worked at ABN AMRO. Atkins was most recently global head of ABS exotics at the firm, while Robinson was European head of cash CDOs. He had an additional stint at Nomura as md, head of structured credit managed product.

Structured Finance

Asset manager adds SF expert

EFA Group has appointed Jacques-Olivier Thomann as senior advisor. He will work with the management team to provide strategic counsel and insights on the business.

Thomann was previously general manager of BNP Paribas' Swiss branch, responsible for structured finance. Earlier roles at the bank posted him in Geneva, Singapore and Paris and included a stint as global head of commodity finance.

Structured Finance

Law firm promotes SF pros

Cadwalader has elected new partners and made promotions to special counsel, with a number of structured finance and credit derivatives lawyers rising through the ranks. These include Dorothy Mehta, Bonnie Neuman, Amy Ray, Kahn Hobbs and Nathan Spanheimer.

Mehta is based in New York. She is a partner in the firm's financial services group and a leader in its investment management practice. She has extensive experience in structuring alternative investment products and recent Dodd-Frank amendments have led to increased involvement with helping structured finance vehicles transition to CFTC regulation.

Neuman is also based in New York. She is a partner, whose practice concentrates on real estate finance, including NPL securitisations.

Ray is a partner based in Washington. She has recently defended clients in antitrust suits spanning municipal derivatives and CDS.

Hobbs becomes special counsel, based in Charlotte. He concentrates his practice on structured finance, primarily focusing on CMBS and resecuritisations.

Spanheimer is also special counsel in Charlotte. He represents lenders and underwriters in secured commercial lending transactions and CLOs.

Structured Finance

Bibby ceo appointed

Bibby Financial has appointed Steven Box as international ceo, expanding his role from European ceo. His operational responsibilities now extend to Canada, USA, India, Hong Kong, Singapore and Malaysia, in an attempt to aid Bibby's growth globally.

Box joined the firm last year after working in numerous roles at HSBC, most recently as global head of receivables finance. His experience ranges across a number of areas, including trade finance and structured finance.

The move follows Bibby's issuance last year of the first rated private deal from an asset-based lender in the UK (SCI 30 November 2015). The £600m variable funding notes are secured by UK factoring receivables originated by Bibby and various UK subsidiaries.

Structured Finance

ECR appoints sales director

Euro Credit Risk (ECR) has appointed Angus Passmore as sales and marketing director. His experience includes working with SME lending organisations, utilising ABS facilities as part of the funding platform.

Passmore's previous roles include a stint as vp at Quadrant Risk Management, promoting the use of enterprise risk data in banks and Basel 2 risk capital assessment. He also undertook advisory tasks in relation to the control and management of SME lending portfolios.

CLOs

CIFC sale considered

CIFC has retained JPMorgan to assist it in exploring a range of strategic alternatives to enhance shareholder value and capitalise on its industry-leading platform. Such alternatives may include a sale of the company or the sale of a stake in the company to a strategic investor, with the objective of accelerating its growth and diversification initiatives.

CIFC says it has not made a decision to enter into any transaction at this time and there is no set timetable for actions to be taken in the process. The company does not intend to disclose any developments related to the process until the board has approved a definitive course of action or otherwise concludes the process.

CMBS

Real estate practice bolstered

Nelson Mullins Riley & Scarborough has added six attorneys to its real estate capital markets practice in the Atlanta office. Rusty Fleming and David Burch join the firm as partners from Morris, Manning & Martin; Meena Dev-Sidhu joins as of counsel from Kilpatrick Townsend & Stockton; and Seth Bloomfield and Jenna Lasseter - formerly of Morris Manning - and David Weinstein, formerly of McGuireWoods, join as associates.

Fleming represents commercial banks and other lenders in a variety of single-asset and multi-asset credit facilities, CMBS, mezzanine and other structured debt arrangements. Burch represents clients across the real estate capital markets spectrum, including correspondents on securitised loans and mezzanine lenders on balance sheet and CLO platforms.

Dev-Sidhu focuses her practice on loan originations, assumptions and complex debt restructurings, with an emphasis on CMBS loans and subordinated debt structures. She represents major banks, special servicers and master servicers in large-scale commercial real estate finance transactions.

Bloomfield focuses his practice in the areas of real estate capital markets and commercial finance, while Lasseter represents lending institutions in a variety of finance transactions. Finally, Weinstein focuses on commercial development, zoning, land use and leasing.

Risk Management

Interactive Data head appointed

ICE has given Lynn Martin the reins to Interactive Data after the exchange purchased the data provider late last year (SCI 15 December 2015). The current president and coo of ICE Data Services will incorporate the services of the firm into her responsibility for overseeing global data operations at ICE.

In this additional role, Martin will report to ICE chairman and ceo Jeffey Sprecher. ICE Data Services now spans ICE and NYSE market data, analytics, connectivity services and Interactive Data.

RMBS

JPMorgan settles RMBS dispute

Ambac Assurance Corporation and its segregated account have settled their RMBS disputes and litigation against JPMorgan. JPMorgan will pay US$995m in cash in return for releases of all Ambac claims against it arising from certain RMBS transactions insured by Ambac. Ambac will also withdraw its objections to JPMorgan's global RMBS settlement with RMBS trustees.

RMBS

Virginia reaches RMBS settlement

Eleven banks have agreed on a US$63m settlement with the Commonwealth of Virginia and the Virginia Retirement System (VRS) over allegations surrounding the sale of allegedly misrepresented RMBS. The agreement has been hailed as the largest non-healthcare-related recovery ever obtained in a suit alleging violations of the Virginia Fraud Against Taxpayers Act.

The banks included and the proportion they paid in the settlement are: Countrywide and Merrill Lynch (combined US$19.5m); RBS (US$10m); Barclays (US$9m); Morgan Stanley (US$6.9m); Deutsche Bank (US$5.62m); Citigroup (US$4.75m); Goldman Sachs (US$2.9m); HSBC (US$2.5m); Credit Suisse (US$1.2m); and UBS (US$850,000).

"This case breaks new ground for Virginia, recovering millions for Virginia taxpayers from banks that we alleged had misrepresented the products they sold to the Commonwealth," says Attorney General Mark Herring. "[The] settlement - which represents significant relief to VRS, taxpayers and pensioners of the Commonwealth - is one of the largest of its kind in the nation."

The case - Commonwealth of Virginia ex rel. Integra REC v. Barclays et al - was initially filed in Richmond City Circuit Court by Integra REC. However, Attorney General Herring intervened to bring the case on behalf of the Commonwealth of Virginia and VRS. The Commonwealth sought to recover US$383m in alleged damages, including US$250.66m of realised losses.

ABS

Indian ABS delinquencies stabilise

The build-up in delinquencies for Indian ABS transactions that closed in 2015 was slower than for those that closed in 2014, as overall delinquencies stabilise. Delinquencies for transactions issued in 2013 and 2014 fell last year, with Fitch noting that the country's economy remains resilient and has rebounded from the slow growth seen in 2014.

Fitch expects national requirements that banks maintain a certain amount of exposure to priority sectors, such as agriculture and SMEs, will push foreign banks to increase their investment in Indian ABS. ABS investment is one of the main channels through which foreign banks can satisfy priority sector lending (PSL) requirements, unlike local banks, which lend directly to PSL borrowers.

Tractor loans account for almost 15% of securitised pools backing Fitch-rated transactions since 1H15, compared with a maximum of 10% before that. The rating agency expects tractor loans to form a larger portion of Indian ABS transactions in the future, due to greater demand from institutional investors for exposure to the agricultural priority sector.

ABS

RCI residual value risk weighed

Auto loan ABS sponsored by Renault's captive finance company RCI Banque are not directly exposed to the market value of Renault vehicles, according to Moody's. Although RCI Banque's dealer floorplan ABS is more closely linked to the manufacturer's creditworthiness, the transaction benefits from a payment rate trigger to mitigate its exposure.

"RCI Banque's auto loan ABS are only indirectly exposed to residual value risk. Their performance has been stable so far and stayed within our expectations. The cumulative default rate of 1.05% is lower than our default rate assumption of 3.5% to 5%," observes Carole Gintz, an svp/manager at Moody's.

Alexis Rivet, an analyst at the agency, adds: "The dealer floorplan ABS' credit risk mainly stems from the dealers' ability to liquidate vehicles at healthy monthly payment rates through retail sales from dealer lots at prices that are sufficient to cover the financed vehicles. As such, we take into account the rating of the vehicle manufacturer, partly because of the possible need for the automaker to step in to support dealers. However, a payment rate trigger is in place to [mitigate] any hypothetical deterioration in the dealer's credit risk."

The payment rate of the dealer floorplan transaction - FCT Cars Alliance DFP France - Series 2013-1 - stood at 53%, as of November 2015, which is well above the 38% payment rate trigger level for early amortisation under the transaction documents.

Moody's research shows that auto loan ABS are mainly exposed to loans that finance new vehicles and amortising loans. Balloon loans account for 52% of the pool in the sponsor's German transaction, for example.

However, exposure to balloon loans varies across RCI Banque's auto ABS transactions and borrowers typically have the option to sell the vehicle back to the dealer. This creates an indirect exposure to Renault's dealerships in a hypothetical scenario, in which an increasing number of borrowers exercise their option to sell the vehicles back to the dealers, combined with lower market values of the vehicles.

Of the three RCI Banque auto loan ABS that Moody's rates, two have assets domiciled in France and one in Germany. The dealer floor plan transaction's assets are domiciled in France.

All four transactions account for a total outstanding pool balance of €2.6bn. Two transactions are still revolving, while the other two have amortised and built up significant additional credit enhancement, Moody's notes.

As the auto loan ABS do not have direct exposure to market value risk, asset performance is not directly related to that of the manufacturer. In contrast, the dealer floor plan transaction relies on the manufacturer's credit through the former's implicit support for the dealers to which the transaction is directly exposed.

ABS

PREPA deal collapses

The deadline for an agreement on PREPA's US$8bn debt restructuring deal was missed, following a breakdown in talks between the utility and its Ad Hoc Group of bondholders. PREPA alleges that the bondholder group was seeking to impose changes on the restructuring agreement (RSA) that it had already rejected in December.

The deadline had been moved numerous times as the utility struggled to agree terms with a number of bondholders, including difficulties with MBIA and Syncora Guarantee. Nonetheless, it was believed to have jumped a key hurdle when it reached a deal with one of the main bondholders, Assured Guaranty (SCI 24 December 2015).

The bondholder group issued a response following the passing of the deadline, claiming that it offered to extend it again to 12 February in order to give the Puerto Rican legislature more time to pass the PREPA Revitalization Act. The group also suggested that it offered to extend its bond purchase agreement (BPA) with PREPA, under which creditors from the restructuring deal would have provided a further US$115m in additional financing.

"This amendment to the BPA reflects a milestone that was previously agreed upon and was included in order to help ensure the deal would get done - as the energy commission approval is a vital element of the agreement," says the bondholder group in its statement. "Unfortunately, PREPA is choosing not to extend the restructuring agreement."

The group describes PREPA's decision as 'disappointing' and 'perplexing', and stresses that the agreement was 'fair' and 'beneficial' to all parties involved, including Puerto Rico. As a result, it has left open the possibility for a deal by calling for PREPA to reconsider the agreement. The utility has also stated its willingness to reopen discussions with the group.

ABS

China debuts finance leasing ABS

The first Chinese ABS that involves finance leasing of used automobiles has hit the market. The transaction was issued last week by social networking internet platform Renren and will be traded on the Shanghai Stock Exchange.

The CNY299.8m deal is broken down into three tranches, with the triple-A piece comprising 68% of the total issued, while the double-A tranche consists of a further 10.5% in notes. The remaining 21.5% in interests will be held by the originator, which is Renren subsidiary Shanghai Renren Finance Lease.

Renren says that the deal has been rated by United Ratings, while Deloitte, Qin Li Law Firm and Grandall Law provided legal advice.

ABS

VW emissions effect yet to bite

Buyer and dealer incentives put in place in the wake of Volkswagen's emissions violations have buoyed sales, despite a continuing stop-sale order on diesel models, says Moody's. However, the rating agency expects both sales and the performance of Volkswagen-sponsored ABS to weaken going forward.

While Volkswagen securities performed well in October, there was some weakening seen in November. The car manufacturer reported that unit sales fell by 21% in November and the floorplan payment rate also dropped.

"Volkswagen's US dealer floorplan ABS trust had a strong payment rate in October, owing to high demand for automobiles in the US, coupled with sales incentives that boosted sales of VW vehicles not affected by the emissions issue," says Moody's analyst Keith Van Doren. "But the credit quality of Volkswagen's ABS is likely to decline, particularly if the company reduces sales incentives."

The agency expects the payment rate to remain strong in December, but to decline in early 2016 as vehicle sales fall due to seasonality and ongoing reputational damage related to the emissions violations. It believes the performance of Volkswagen's ABS will continue to deteriorate if the company does not address the emissions violation issues satisfactorily.

ABS

PREPA deal back on

PREPA and its Ad Hoc Group of bondholders have reopened talks regarding the potential US$8bn restructuring transaction, a proposal that appeared to have fallen through after failing to reach the legislative deadline last week (SCI 25 January). An amended agreement is now edging closer, following talks between the parties over the weekend.

Negotiations between the parties have dragged on for months over the deal, which is designed to help ease a substantial amount of the Puerto Rico utility's debt (SCI passim). However, the PREPA Bondholder Group says that a restructured arrangement will now allow the deal to come into law by 16 February, pushing it to four days after the original 12 February deadline requested by PREPA.

A new bond purchase agreement has also been reached, in which the PREPA Bondholder Group and other creditors involved will provide US$111m of additional financing by purchasing the new bonds. Half of the notes will be issued once the securitisation legislation is passed, with the remaining half to be issued once the deal's structure is submitted to the Puerto Rico Commission on Energy.

"We are pleased to have reached this agreement with PREPA, which puts everyone back on track to consummate a deal that will benefit all stakeholders, especially the people of Puerto Rico," says Stephen Spencer, financial advisor to the PREPA Bondholder Group. He adds that the additional 25-day extension to the original deadline is sufficient for the legislation to be passed in time.

ABS

Armenia deal debuts

Armenia has seen the launch of its first securitisation, listed on the country's stock exchange NASDAQ OMX Armenia. The deal was issued through the SPV, Loan Portfolio Securitisation Fund I, which was established in August 2015 to securitise US$2m worth of microfinance loans originated by five universal credit organisations (UCOs).

Two issues of the fund will be listed on the stock exchange, the first of which comprises 11,328 bonds worth US$1.13m that pay a coupon of 8.5% and have a maturity period of 36 months. The second issue contains over 44,000 bonds for a total amount of AMD446.3m. The coupon rate for these bonds stands at 15%, while the maturity period is also 36 months.

To reduce risk for bondholders, a guarantee was issued in November 2015 to cover 50% of the bonds' principal. The deal will be used to create funds for the development of rural areas in Armenia, specifically for farmers and entrepreneurs.

The five UCOs that worked together to provide the loans were CARD AgroCredit, Garni Invest, Global Credit, Kamurj and Nor Horizon, while Capital Investments served as manager for the fund.

ABS

Refinance SLABS debuts

Online lender Earnest Operations is in the market with its inaugural rated term securitisation. The US$212m transaction, dubbed Earnest Student Loan Program 2016-A, is backed by refinanced student loans.

DBRS has assigned provisional ratings to the ABS, which comprises US$34.71m single-A rated class A1 notes, US$70.24m single-A class A2s and US$7.05m triple-B class Bs. The trust will also issue a US$100m class of unrated certificates.

The Higher Education Loan Authority of the State of Missouri acts as the hot back-up servicer for the transaction and will assume the servicing responsibilities of Earnest under certain circumstances.

The Earnest refinancing product is offered to individuals who will graduate within six months of issuance or who have already graduated with an undergraduate or graduate degree. As of 2015, the lender had funded US$400m of student loans to 5,580 borrowers.

In rating the ABS, DBRS highlights borrower quality. It states that EARN 2016-A exhibits high-quality attributes in borrower credit, with the weighted average credit score being 775 or above and WA borrower income of US$143,535. According to Earnest, since it began business there have been no loans more than 60 days delinquent and two hardship forbearances granted.

A further positive attribute of the loan pool, according to US Department of Education statistics, is that the WA three-year cohort default rate by college of EARN 2016-A is approximately 3.8% versus 6.3% for private four-year institutions. Furthermore, DBRS highlights the significant proportion of Earnest borrowers undertaking graduate degrees and therefore the higher average earning potential of the borrowers in the pool.

Approximately 23.2% of the EARN 2016-A graduate school borrowers have a medical degree and WA income of approximately US$202,000; 19.1% have graduated from law school and have a WA income of approximately US$150,000; and 17% hold an MBA degree and have a WA income of approximately US$158,000.

The agency also notes the short WAL, which is approximately 3.53 years for the class A notes. Compared with the majority of ABS transactions backed by traditional student loan assets with longer WALs, EARN 2016-A's shorter WALs suggests it will mitigate the transaction's exposure to the risks of negative macroeconomic conditions.

WALs are expected to be shorter than for a typical private student loan securitisation because 100% of the EARN 2016-A borrowers are already in repayment (with no loans having interest-only features) and have a significantly greater amount of excess monthly income, which can be used to pay down principal.

Structured Finance

South Korean issuance surges

South Korean securitisation issuance nearly doubled in 2015, rising by 99.8% to Won83trn from Won41.5trn the previous year. The figures come from the South Korean Financial Supervisory Service, which reveals that much of the increase was due to a 284.5% year-on-year rise in MBS issued by the Korean Housing Finance Corporation (KHFC).

The rapid increase in issuance is attributed to the change in government policy to implement fixed rate, long-term mortgage loans in place of short-term, floating rate loans. The policy shift is part of an effort to stabilise the South Korean housing market. Banks that allowed the transition to the safer loans transferred these through to KHFC.

Meanwhile, ABS issued by financial and non-financial companies came to Won19trn and Won8.2trn respectively in 2015. In particular, there was an increase in ABS issues backed by capital and lease companies - particularly involving car installment and lease payment receivables - which rose from Won4.5trn to Won5.7trn.

In 1H15, financing was generally backed by corporate bond issuance as capital firms based on banks achieved higher credit ratings while interest rates remained low. However, from September, financing through the ABS market was on the rise as the US Fed's decision to raise interest rates hit investor sentiment and the spread between ABS and US Treasuries widened.

CDO

Trups defaults drop again

Combined defaults and deferrals for US bank Trups CDOs decreased to 17.5% at the end of December, after maintaining their 18% rate the month prior, according to Fitch's latest index results for the sector. Approximately 0.2% of the 0.5% decline is attributed to the removal of defaulted and deferring collateral within one Trups CDO that no longer has outstanding ratings from the agency.

The other 0.3% of the decline comes from new cures, which were brought about by four banks representing US$29m of notional. In addition, one cured issuer with notional of US$6m in one CDO redeemed its Trups. Three defaulted issuers, with a combined notional of US$52.5m in two CDOs, were also sold from their portfolios with a realised weighted average recovery of 9.5%.

One bank with total notional of US$7m in two CDOs also began deferring for the first time. Across 74 Fitch-rated bank and mixed bank and insurance Trups CDOs, 228 defaulted issuers remain in the portfolio, representing approximately US$5.3bn of collateral. At the end of 2015, 104 issuers were deferring interest payments on US$1.3bn of collateral, compared to 171 bank issuers - at US$1.9bn of notional - deferring at end-2014.

CDS

External review extended

ISDA's EMEA Determinations Committee has extended the external review schedule in connection with the governmental intervention credit event question on Novo Banco, such that the oral argument will be held on 12 February and the decision deadline will be 16 February. The association says that the amendment is due to the availability of the external review panel. The submission deadline for ISDA members to submit written materials in connection with the external review process remains unchanged (5 February).

The external review panel consists of QCs Adrian Beltrami and Mark Hapgood, as well as Bernard Rix. QC David Allison has been selected as an alternate external reviewer.

CLOs

CLO 2.0 refinancing on agenda

Moody's notes that a number of European CLO 2.0 tranches exiting their non-call periods are eligible for refinancing or repricing in 2016, including 30 2014 vintage deals and six 2013 vintage deals that exited their non-call periods in 2015. The agency says that refinancing at lower coupons would improve credit enhancement by increasing excess spread and reducing liability costs on the CLOs.

"The most likely candidates to undertake a refinancing are deals with high triple-A spreads and CLOs that are not compliant with regulation," says Moody's avp and analyst Justyna Kochanska. "New issue CLO spread levels will be the key driver of refinancing and repricings in the future, as the spread would need to make economic sense."

She adds that that the lower liability costs would enhance returns for CLO equity investors. Refinancing or repricing could also offset the negative effect of diminished contribution of Euribor or Libor floors to the portfolio's weighted-average spread if interest rates rise.

New issue triple-A spreads rose to 143bp in 4Q15 from 134bp the previous quarter. They are now starting to oscillate at around 150bp, diverging from the general trend of decreasing spreads that has persisted since the reopening of the European CLO 2.0 market in 2013.

CMBS

Conduit leverage to 'continue rising'

The credit quality of US conduit/fusion CMBS continued to deteriorate in Q415, Moody's notes. Indeed, the agency expects conduit loan leverage to continue rising "for some time yet".

Conduit loan leverage - as measured by Moody's loan-to-value (MLTV) ratio - rose to 118.9% in 4Q15 from 118.2% in the prior quarter, exceeding its pre-crisis high of 117.5% for the third time. About 22% of conduit collateral in Q4 had an MLTV above 130%, of which about 7% had an MLTV above 140%.

"We expect Moody's loan-to-value ratio to increase over the next few quarters," says Moody's director of commercial real estate research Tad Philipp. "Thereafter, rising interest rates and risk retention may help establish a floor for credit quality decline for this cycle."

Rising rates should slow appreciation in property prices, given the effect of interest rates on cap rates, Philipp adds. Further, risk retention should be a net credit positive, given that the buyers of most junior conduit classes will make a larger and longer-term capital commitment - reinforcing their incentive to help 'shape' the quality of the loan pool.

At the same time, the cushion between super senior and natural triple-A enhancement levels continues to shrink. The cushion averaged about three percentage points in the past quarter and in some instances was less than one percentage point.

The credit enhancement assigned by other credit rating agencies to class D notes to achieve their lowest investment grade rating averaged nine percentage points in Q4, which was about five percentage points less than Moody's assessed for the Baa3 level. The level assigned by other agencies to class Ds roughly aligns with the enhancement level Moody's would assess for a B1 rating.

Meanwhile, Moody's has introduced a new metric: the effective interest-only term. The metric takes into account both the percentage of loans with an interest-only period and, for these loans, the length of that period. The effective interest-only period for conduit loans currently exceeds 40 months, a level that equates with issuance from late 2005 to early 2006.

CMBS

Maturity wall diminishing

Falling US CMBS delinquencies and the slowing pace of special servicing loan transfers year-over-year have contributed to improved performance metrics within the existing portfolio of Fitch-rated fixed rate conduit transactions. At the same time, the size of the maturity wall has declined year-over-year and continues to diminish.

Current delinquencies have declined by over 50% from a peak of 9.01% in July 2011. As of year-end 2015, the delinquency rate was 4.02%, compared to 4.62% at end-2014 and 5.98% at end-2013. The year-end 2016 rate is expected to fall between 2.5% and 3%.

Similarly, the amount of existing defaulted loans within Fitch's delinquency index decreased to US$15bn at year-end 2015 from US$18bn at end-2014 and US$25bn at end-2013. Conversely, loan defeasance has increased to US$20bn at end-2015 from US$18bn at end-2014 and US$12bn at end-2013.

The agency also continues to see a drop in the rate of new special servicing transfers in its portfolio. In 2015, US$5bn of loans transferred to special servicers, compared to US$7.7bn in 2014, US$8.1bn in 2013, US$17bn in 2012, US$20bn in 2011 and US$26bn in 2010.

Excluding defeased and defaulted loans, US$45bn of loans are currently scheduled to mature in 2016 and US$64bn in 2017. This compares to a projected US$58bn and US$72bn respectively, as of year-end 2014, and US$67bn and US$76bn as of year-end 2013.

Insurance-linked securities

CAA hits ILS ratings

S&P has lowered its ratings on the class A and B notes issued by Vitality Re V Series 2014 and Vitality Re VI Series 2015 by two notches to triple-B minus and double-B minus respectively. The action reflects updated information received from Milliman and Aetna Life Insurance Co related to the recently-priced Vitality Re VII catastrophe bond.

The Consolidated Appropriations Act 2016 (CAA) was signed into law last month, amending certain provisions in the Affordable Care Act, including suspending the industry-wide health insurer fee (HIF) for the calendar year 2017. Because the HIF is generally passed on to policyholders through increased premiums, the suspension will likely reduce premiums. This effect will phase in on a renewal basis for rating periods that cross the 2017 calendar year.

Due to the changes, per Milliman, the expected result would be upward pressure on the covered business medical benefits ratio (MBR) in 2016 and 2017 relative to the immediately preceding calendar year (as premiums are likely to be reduced, reflecting the one-year suspension of the industry-wide HIF), followed by a downward movement in the covered business MBR in 2018 and 2019 relative to the immediately preceding calendar year (as premiums are likely to be increased to re-incorporate the HIF after the one-year suspension expires).

For 2017, based on the covered business renewal distribution and the phase-in effects of the HIF suspension, Milliman estimates that the covered business MBR impact will be an increase of approximately 250bp for 2017 compared to 2016. For 2018, the suspension phase-out impact should reduce the covered business MBR by 250bp from 2017.

There is no provision for any CAA-related adjustment for the Vitality Re V or VI notes. S&P has received updated modelling from Milliman incorporating the estimated impact the 2017 HIF suspension would have on the attachment probability of each class of notes based on the Vitality Re VII model, including all assumptions and experience related to the covered business. The agency has based its ratings on all outstanding Vitality Re issuances on the same stress scenarios.

The Vitality Re V notes mature in 2019. If the one-year estimated increase of 250bp in the covered business MBR for 2017 is followed by a similar decrease in 2018, S&P expects to raise their ratings back to their initial level. Vitality Re VI notes mature on 8 January 2018, so the agency does not anticipate taking any additional ratings actions related to the CAA-adjustment at this time.

Vitality Re IV Series 2013 class A and B notes mature on 9 January 2017, so they are not affected by this change.

Risk Management

Canadian OTC rules harmonised

Canadian securities regulators across the country's various provinces have agreed to implement rules on derivatives product determination and reporting on trade depositories and derivatives data. This follows a consultation on the proposals of the rules last year (SCI 27 January 2015) and paves way for the harmonisation of a derivatives reporting regime in line with Manitoba, Ontario, Quebec and internationally.

The provinces that have agreed to the implementation are: Alberta, British Columbia, New Brunswick, Newfoundland and Labrador, Northwest Territories, Nova Scotia, Nunavut, Prince Edward Island, Saskatchewan and Yukon.

The rules that have been incorporated specifically govern the reporting and collection of OTC derivatives data. The Canadian Securities Administrators says that the financial instruments will improve the regulatory oversight of this sector of the market, while providing the ability to identify and address systemic risk and the risk of market abuse.

Risk Management

SEFs officially registered

The US CFTC has granted registration to 18 SEFs, which had previously operated under temporary registration status. A further five SEFs currently remain temporarily registered.

The newly registered SEFs are: 360 Trading Networks; BGC Derivatives Markets; Bloomberg SEF; Chicago Mercantile Exchange; DW SEF; GFI Swaps Exchange; ICAP Global Derivatives; ICAP SEF (US); ICE Swap Trade; Javelin SEF; LatAm SEF; MarketAxess SEF; SwapEx; Thomson Reuters (SEF); tpSEF; Tradition SEF; trueEX; and TW SEF.

RMBS

First jumbo RMBS 2.0s called

The US prime jumbo RMBS sector has seen its first three post-crisis transactions called, none of which have incurred any losses. However, despite overall exceptional performance in the asset class, Fitch expects clean-up call volume to be limited over the coming months.

The call options were exercised on three Sequoia Mortgage Trust transactions issued in 2010 and 2011. Only one loan out of over 1,000 within the three deals became more than 90 days delinquent.

The strong performance of these deals, along with several others issued in 2012, are attributed to fast prepayment rates as a result of mortgage rate declines between 2011 and 2013. However, Fitch stresses that deals issued after this time will not produce the same enticement for a call option, at least in the short term.

"Prime jumbo RMBS issued after 2012 generally do not enjoy the same refinance incentive as 2011 to 2012 deals," says Fitch director Sean Nelson. "As a result, RMBS deals issued post-2012 are not expected to pay down to their clean-up call thresholds for several years."

Last year saw US prime jumbo RMBS issuance surpass the previous two years in number of transactions, as well as eclipsing 2014 in issuance dollar amount. In total, Fitch reported 35 prime jumbo RMBS deals coming to market in 2015, compared to 31 and 28 transactions in 2013 and 2014 respectively.

Further, total issuance in 2015 was roughly US$11.9bn, up from the 2014 total of US$8.8bn. To date, only one post-crisis prime jumbo transaction has a 60-plus day delinquency rate over 1%, while their pre-crisis counterparts generally range between 5% to 15%.

RMBS

Countrywide pay-outs calculated

National Economic Research Associates submitted their allocable share calculations earlier this month for the 530 RMBS deals involved in the US$8.5bn Countrywide settlement. The calculations were largely in line with market expectations across products and vintages, according to Morgan Stanley RMBS analysts.

"2004 and 2005 vintage alt-A and prime jumbo deals came up short of expected pay-out most regularly," they observe. "However, given their relatively low share of total losses, that did not lead to large absolute dollar amounts. Option ARM and subprime had the most deals exceed their expected pay-out by more than US$1m."

The next and penultimate step in the process is the payment from Bank of America to BNY Mellon, which should occur before 10 February. The final step is the cash distribution, which is expected in March or April.

The Morgan Stanley analysts suggest that the silver lining to waiting for over 54 months from the day the settlement was announced to learning just how much money each deal will receive is that the share of projected future losses relative to realised losses has decreased significantly. Realised losses have increased by almost 150% during the period, from US$27.4bn to US$67.1bn.

RMBS

Loan re-classification resolved

Moody's has affirmed its ratings of all Pepper Residential Securities Trust No. 15 notes, following a review triggered by a re-classification of some underlying loans. The re-classification involved 6.49% of the total pool balance having either one or two adverse credit events prior to origination, instead of having no adverse credit events.

Pepper Group notified Moody's that the adverse credit history records were not correctly reflected for 49 loans totalling A$18.25m, representing 6.49% of the total pool balance at 31 December 2015. The agency consequently increased the MILAN credit enhancement assumption on the portfolio to 17.4% from 16.7% and the Moody's expected loss assumption to 1.8% from 1.7%, reflecting the weaker credit characteristics of the portfolio.

A$19.1m of the notes have been repaid: since closing last October, the amortisation of the portfolio has resulted in the sequential repayment of the class A1A and A2 notes and the build-up of the class A1S1 redemption fund. Further, the yield enhancement reserve has accumulated A$216,913 of total available income, which is available to meet losses and charge-offs while any class A notes are outstanding. The retention ledger has also accumulated AU$36,152 of total available income, which is available to meet losses and charge-offs.

As of the interest payment date on 18 January, the class A1S1 notes and class A1A notes benefit from 31% CE, while the class A2 notes benefit from 19% CE. These levels are higher than Moody's updated MILAN CE assumption.

RMBS

Fresh Freddie NPL sales scheduled

Freddie Mac is marketing its latest NPL offering, an auction of US$1.6bn in seasoned non-performing residential home loans held in its mortgage investment portfolio. The loans are currently serviced by Nationstar Mortgage.

The NPLs are being marketed via seven pools. Of these, five will be geographically diversified standard pool offerings (SPO) and two will be geographically concentrated extended timeline pool offerings (EXPO), which target participation by smaller investors.

Bids are due on the SPO offerings by 23 February and on the EXPO offerings by 8 March. The sales are expected to settle in 2Q16.