Contents

CLOs

Stabilisation sought

CLO equity arb, risk retention remain challenging

Signs of stabilisation in the US CLO market are emerging, after a volatile start to the year that brought spread widening and a halt to new issuance. However, equity arbitrage remains challenging and risk retention requirements still appear to be casting a shadow over the sector.

"We're seeing more firmness in spreads, driven by a slew of new buyers entering the market to take advantage of where levels are currently," confirms Christopher Long, president, Palmer Square Capital Management. "However, some volatility remains: although the pipeline is building, it is likely to meet some resistance, given sluggish secondary activity and low demand for CLO equity."

He continues: "Some managers are formally marketing deals, but with no specific timeline. The disconnect between primary and secondary continues: stabilisation in the secondary market is necessary to make primary work. Liabilities are too wide and remain challenging for new issuance."

Initially the volatility was driven by concerns over exposure to oil and gas credits (SCI 26 January), but Long says it became clear to many investors that commodity exposures alone would be extremely unlikely to break CLOs, given their robust structures. "A typical CLO pool has between 3%-5% exposure to oil and gas names and compares favourably to the high yield index, which has exposure of 18% or higher. The market has moved beyond this concern."

Nevertheless, the equity arbitrage remains challenging and risk retention requirements still appear to be casting a shadow over the market, causing many bank analysts to reduce their issuance forecasts for 2016. Against this backdrop, some managers are bringing creative structures to try and ameliorate the asset/liability mismatch.

Long cites his firm's latest transaction - Palmer Square Loan Funding 2016-1 - as an example (see SCI's new issue database). Instead of the standard four-year non-call structure, the deal is static and has a shorter duration.

"A static structure provides a known portfolio that amortises quickly, as there's no reinvestment period. In the case of our recent deal, we felt that these features deserved tighter liabilities," he explains.

Alternatively, some managers are bringing longer-dated CLOs, which allow more time to manage the spread between assets and liabilities.

Another development that is being touted as potentially helpful to CLO equity is the issuance of loans without Libor floors, as highlighted by CVC and CPPIB's recent acquisition of Petco Animal Supplies. The loan included a US$700m B2 tranche that did not have a Libor floor.

But Long suggests that issuance of floorless loans is yet to become a trend. "The average loan price has dropped considerably, but not by enough to compensate for liability spreads," he remarks.

Loan defaults in the commodities sector are expected to pick up in 2H16 and peak in late-2017/early 2018. However, excluding commodity names, there appears to be strong liquidity in the loan market and maturity profiles are lengthening, so defaults in other sectors should remain benign.

Long believes that CLOs will be able to navigate the default and recovery landscape well. "Such market dislocations create opportunities - it's difficult to precisely pick the bottom, but at these spread levels, CLO paper remains attractive and there are attractive loan segments to tap. CLO debt offers good relative value, being wide to comparably rated credit and extremely unlikely to suffer a default. Plus it's floating rate, so it can be relied upon in a rising interest rate environment."

He continues: "We're hopeful that stabilisation will continue as participants recognise these advantages and the mismatch between assets and liabilities will eventually reduce. The CLO market is resilient and there's no reason why that wouldn't continue to be the case."

Several tranches from three CLO 2.0 deals managed by Silvermine Capital Management were recently downgraded due to concerns over the transactions' exposure to commodity names. Moody's this week lowered the ratings on US$86.9m of notes issued by Silvermore CLO (class B through E) and US$68.6m of notes issued by Silver Spring CLO (class C1 through F).

The agency says the actions reflect the substantial credit deterioration in the underlying portfolio of the CLOs and increased expected losses on the notes, due primarily to their large exposure to energy and commodity-linked collateral assets whose ratings were recently downgraded, are currently on review for downgrade or have negative credit outlooks. The former deal has a 14% exposure to energy names and 6% exposure to metals and mining, while the latter has a 15% exposure to energy names and 4% exposure to metals and mining.

At end-January, S&P lowered its rating on the ECP CLO 2013-5 class E notes, citing deterioration in the credit quality of the portfolio - with triple-C rated and defaulted collateral rising from zero to 5.10% and 0.48% of the aggregate principal balance respectively. The portfolio has a 13.31% exposure to loans in the energy sector.

CS

ABS

Downgrade possible

Marketplace ABS ratings review sparks concerns

Moody's has placed the subordinated notes of three marketplace lending securitisations on review for possible downgrade, less than a year after the deals priced. The move has sparked concerns about the rating process for and collateral performance of the asset class.

The affected notes are the Citi Held For Asset Issuance 2015-PM1, 2015-PM2 and 2015-PM3 class C tranches, which Moody's currently rates Ba3. The agency cites a faster build-up of delinquencies and charge-offs than expected as the reason for the rating action.

Its updated expected cumulative lifetime net loss for each of the pools backing the three CHAI transactions has increased to 12% of original pool balance from 8%-8.5% at closing. This loss expectation translates to 13.6%, 13.1% and 12.3% in remaining losses as a percentage of the current outstanding pool balances of CHAI PM1, PM2 and PM3 respectively.

Contrastingly, Moody's has also upgraded the class A and B notes issued by Consumer Credit Origination Loan Trust 2015-1 from Baa3 and Ba3 to Baa1 and Ba2 respectively. The move was prompted by a fast build-up in credit enhancement as the deal paid down and deleveraged, despite the agency's upward revision in expected losses for the deal from 8% to 12% - again, due to a steeper increase in delinquencies and charge-offs than expected.

The pools across all four deals comprise loans originated via Prosper's marketplace lending platform.

Dev Chatterjee, md of ABS surveillance at Moody's, points out that the agency "always highlighted the volatility of marketplace loans as an asset class". As such, the potential downgrades could be seen as an indicator of the volatility inherent in the asset class and the risks associated with it.

Chatterjee states: "We have highlighted these risks in our research and they include the fact that the loans are unsecured consumer debt, which means they will naturally be less of a priority to pay off than other forms of debt, such as an auto loan or mortgage."

He continues: "There are also certain risks associated specifically with marketplace loans, such as that it's a new asset class and that it's a rapidly growing sector, especially in terms of originations. There are also legal risks surrounding the true lender status, and then the outcome of the Madden case also poses a risk - all of which we have taken into account."

After an assessment of both the CHAI and CCOLT pools, PeerIQ ceo Ram Ahluwalia suggests that the increase in delinquencies in the CHAI pools is less to do with different underwriting standards and more that the CHAI deals are of a later vintage. The loans in the CCOLT deal were mostly originated in 1Q15, while those in the CHAI deals were mostly originated in 2H15.

"In this period, we've observed a greater number of delinquencies after controlling for FICO and geo variables. This suggests vintage effects, rather than underwriting standards are the primary explanatory variables," Ahluwalia explains.

Of all the affected transactions, only CHAI 2015-PM3 was rated by another agency. In its analysis of the deal, Fitch assumed a base-case gross default rate of 11%, with 5% recoveries.

Deutsche Bank ABS analysts suggest that, on this basis, Moody's may have been too optimistic about collateral performance at the outset. "Given that Fitch rated one of the same deals and came to base case losses of 11%, compared with 8.5% for Moody's, we think this is more an issue of Moody's original projections than it is for deterioration in performance," they note.

They conclude: "Given the lack of performance data through a complete credit cycle, it wouldn't be at all unexpected if there were hiccups in early transactions backed by marketplace loans. This is why the securitisations were structured with cumulative default triggers that turbo the notes if breached and robust levels of hard credit enhancement, which include target overcollateralisation levels and non-declining reserve accounts."

RB

Capital Relief Trades

Supply and demand

Capital relief trade pricing, liquidity discussed

Demand for capital relief trades has outweighed supply in recent years, driving prices lower, according to panellists at SCI's inaugural capital relief trades conference in December. Liquidity remains thin, however, and the spectre of volatility is appearing on the horizon.

Juan Grana, md of structured solutions at Nomura, says that demand for capital relief trades has outweighed supply, which has driven pricing lower over the last couple of years. "From a broader perspective, focus on risk detachment and attachment points, callability and replenishment rights have increased. The perceived liquidity of a position can impact pricing: investors assign value to syndicated transactions with the knowledge they can exit a trade if necessary," he explains.

He adds: "Most investors are buy-and-hold - mainly due to the effort it takes to due diligence a deal - but others do trade positions. However, liquidity is currently being hampered by a lack of offers."

Typical capital relief trade structures don't lend themselves to transferability due to restrictive policies on information disclosure. Consequently, Grana suggests that standardisation would facilitate liquidity, which would be a positive development for both issuers and investors.

Andrea Modolo, director at UniCredit, agrees that supply is an issue. "Deals take time to be approved and any external factors that could impact pricing need to be considered fully. But originators can facilitate the process by having a data package ready in plenty of time."

Indeed, Matthias Korn, head of financial solutions at Caplantic, says that CRT originators need to demonstrate their business models more readily. "No investor is interested in investing where information is scarce, especially when sufficient performance data is generally available," he observes.

He adds: "Data provided by banks for investors isn't the same as that prepared for regulators, so clients need to datamine and present information in an accessible format. Investors are typically interested in long-term relationships and the ability to close more than one deal with the same originator, as first-time costs are high."

Meanwhile, execution depends on the portfolio, according to Korn. "If a portfolio contains many different types of assets, it's difficult to auction successfully because it's not market standard. In this case, originators may invite a select few investors to do due diligence and then close with one or two. For esoteric assets or pan-European deals, a bilateral solution is more appropriate, while syndication makes sense for more standardised assets."

Looking ahead, there seems to be similar volume in the pipeline as there was in 2015, which is considered to have been the best year yet in terms of issuance. The CRT investor base is seeing gradual growth, with some new players entering the market, others exiting and existing ones increasing their allocation. Grana confirms that the capital being deployed in the sector continues to rise.

Modolo expects SME portfolios to remain the main assets being securitised, but the number of first-time originators and jurisdictions - such as Italy and Spain - to increase in 2016. "The market may also see structural evolution, such as revolving deals to increase the efficiency for shorter-term assets," he notes.

Korn anticipates that activity in regulatory capital deals will accelerate into 2018, when IFRS 9 - which could threaten loss provision treatment - kicks in. "Many banks are putting portfolios together that demonstrate good performance but are inefficient to hold on balance sheet. Some assets that are currently treated as esoteric will gradually become less exotic, thereby creating increased supply and better investor understanding," he adds.

Against this backdrop, coupons - which currently range from 7% to 10% - are expected to remain static or move slightly wider, due to the emergence of idiosyncratic risk. If the credit cycle turns, however, some programmes may see defaults - and this will cause price volatility, especially for those that are priced on the assumption of no defaults. Grana nevertheless expects lower volatility in the CRT asset class versus broader credit and equity markets.

CS

RMBS

Mortgage movers

Non-bank lenders reshaping UK RMBS

Tough capital constraints are weighing on the incentive of large incumbent lenders to maintain a strong presence in the UK RMBS market. This has paved the way for a variety of new lenders - including asset managers - to enter the sector, prompting a shift in its landscape.

Last year saw Kensington Mortgages become the largest securitiser of UK RMBS, placing four deals at a value of £2.8bn. The lender has become more active in the sector since it was sold by Investec to Blackstone Tactical Opportunities and TPG Special Situations Partners back in 2014 (SCI 10 September 2014). Likeminded non-high street lenders - such as Paragon and Precise Mortgages - have also edged their way in, taking up space often occupied by banks now seeking cheaper financing alternatives.

"It's not necessarily just a narrowing of the lending gap between banks and non-banks," says Rob Ford, partner and portfolio manager at TwentyFour Asset Management. "A substantial factor behind the latter's growth has come through portfolio acquisition."

A recent example of this is Kensington's acquisition of seasoned loans from GE Money in August 2015. The loans were subsequently placed in the firm's Trinity Square 2015-1 and 2016-1 transactions (see SCI's new issuance database).

"Due to changing dynamics, private equity has become a larger driver for the issuance market," says Keith Gorman, head of European RMBS at DBRS. "This can help explain Kensington's success. However, there will always be a combination of both bank and non-bank lenders, so these developments shouldn't suggest that the large high street lenders are going leave the market."

Nonetheless, Moody's suggests that challenger lenders will continue to emerge, particularly as the gradual maturity of the Bank of England's Funding for Lending Scheme adds pressure on the banking sector's net interest margins. As a result, lenders with a small deposit base or fast growth rate could turn to securitisation as an alternative funding option.

"Challenger banks try to gain market share from the incumbent lenders through more attractive pricing, while newly created entrants benefit from greater flexibility, owing to their lack of legacy conduct issues and smaller, less costly infrastructures," says Carlos Suarez Duarte, a Moody's vp and senior analyst.

In relation to such changes, UK RMBS is also undergoing a product makeover. Before the crisis, the market was dominated by multi-billion, multi-currency master trust programmes, backed by prime collateral from lenders like RBS. But in recent years, the rise in non-bank lenders and the reduction of master trust issuance have worked hand-in-hand with increasing demand for non-conforming mortgages.

According to JPMorgan European securitisation analysts, buy-to-let (BTL) and non-conforming RMBS account for more than half the total UK volume sold to investors in 2015, at £17.7bn. Linked to this has been the rise of other types of non-bank lenders, including building societies.

Lending volume attributed to these entities more than doubled in 2014 compared to 2010, now standing at £53bn. There has been a 51% growth in lending volumes in the broader market over the same period.

Yet building societies have also securitised prime loans, often choosing to package them into standalone transactions. In total, they have contributed to selling prime RMBS bonds worth some €10bn over 16 transactions since 2011.

"There's a demand for high quality collateral from investors and sterling paper is one area where issuers can provide that," says Gorman. "This gives building societies the perfect opportunity to diversify their funding."

Departing from the more complex master trust structures used by the largest high street lenders, standalone RMBS programmes are considered more simplified. The deals often feature a floating rate, two-tranche structure and are reliant on pass-through amortisation.

In addition, they lack certain baggage, such as the increasing cost that comes with using a master trust. This has not only shrunk the role of the master trust in the market, but also confined their use to a small number of institutions that have the funding capability to utilise the structure.

"Regulations definitely play a big role, particularly when added costs make it fundamentally more expensive to issue tranches in other currencies," explains Gorman.

Ford adds that this can be viewed in the context of comparison. "Nationwide paid three-month Libor plus 65bp for the three-year sterling tranche of its latest Silverstone RMBS deal and this is without the additional costs from documentation, credit enhancement and so on that come with the complexity of an RMBS master trust deal," he says. "On the other hand, Lloyds recently issued a three-year floating rate, sterling-denominated covered bond - a market where issuance costs are much cheaper and the process is typically much quicker and easier. In this case, it paid almost 30bp less at three-month Libor plus 37bp."

Nonetheless, he says there is still a place for master trusts in the market as large lenders want to maximise diversity in the range of financing options available to them. Covered bonds also encumber significantly more assets than RMBS and that comes at an added, hidden cost.

Nationwide's deal provides the best recent example of issuers' maintained faith in master trusts. The Silverstone Master Issuer Series 2016-1 transaction, which priced last week, was assigned triple-A ratings at the class 1A1, 1A2 and 2A1 level by Fitch, Moody's and S&P.

The tranches were denominated in three separate currencies. The 1A1 senior notes totalled US$275m, the 1A2s amounted to £250m and the 2A1s were the largest at €700m.

Meanwhile, the combination of changes and mainstays in the market has the potential to diversify further within UK RMBS. The most novel example is the potential for asset managers to play a role as secondary lenders in the market, according to Ford.

His firm, TwentyFour Asset Management, launched its UK Mortgages fund last year with the intention of purchasing mortgage portfolios that it can subsequently securitise. This started with its purchase of a £310m portfolio of BTL mortgages from Coventry Building Society in November (SCI 4 November 2015).

"The fund allows us to work with both banks and non-banks," says Ford. "It will acquire mortgages from originators, either on an on-going basis or on distinct bases. These can then be funded for the longer term via securitisation structures and the fund then effectively becomes a lender and an issuer-sponsor."

This allows the fund to release capital/funding while simultaneously producing another form of non-bank lender to the market, albeit through an alternative route. Whether this approach catches on remains to be seen.

"I think there is nothing to say that other fund managers won't choose to do something similar down the line," says Ford. "We could very well see others asset managers become the latest form of emerging non-bank lenders in the market."

JA

Secondary markets

Euro secondary solid

The European securitisation secondary market remained solid on Friday despite broader market weakness.

Volumes remained generally low as the week closed out, but tone remained firm and most spreads ended the session unchanged. Off-BWIC activity once again revolved around prime assets and eligible peripherals. Meanwhile, BWICs generated a flurry of activity in the afternoon and the bulk of line items traded well.

There are currently two BWICs on the European scheduled for today, both are of lesser-seen types. First, is a UK non-conforming residual auction at 13:30 London time. It involves the subordinated notes, mortgage early repayment certificates and residual certificates of ALBA 2007-1.

Second, due by 14:00 is a buy it now BWIC, which now amounts to four line items as the £900k slice of TMSE 1 C has already traded ahead. The others and their BIN prices are: £2.5m NDPFT 2014-1 C at 98.70; £1.1m NDPFT 2014-1 D at 98.70; £1.9m PARGN 24 C at 99.80; and €2.5m TRICO 2014-1 B at 99.50. None of the bonds has covered with a price on PriceABS in the past three months.

Secondary markets

Euro secondary starts slowly

It was a slow start to the week for the European securitisation secondary market, but today looks likely to see something of a pick-up.

"Yesterday was for the most part pretty slow," says one trader. "Primarily there was a just a lot of chatter around Brexit and its broader implications including the potential for people to step away from sterling assets - a discussion that will undoubtedly continue for months."

The trader continues: "There were, however, a handful of BWICs and execution on them was fairly strong. Away from that flows were light, partly thanks to it being a typically quiet Monday and also because of the high levels of volatility we saw last week, which tends to keep a lot of investors sidelined until it has eased for a few days."

Nevertheless, the market looks to be picking up a little today, the trader notes. "There are quite a lot of BWICs on the schedule for today and I expect most line items, especially the prime assets, to trade well."

There are currently five BWICs on the European schedule for today. They include two CLO lists, one for UK card ABS and a PARGN-focused auction.

The largest is a 61.5m original face nine line euro and sterling mix of senior autos and RMBS due at 15:00 London time. It comprises: BERAB 4 A, CORDR 2 B, CREDI 5 A, DRVUK 2 B, FRIAR 3 A, GFUND 2016-1X A2A, IMCAJ 1 A, RHIPO 9 A3 and STORM 2016-1 A2. Only FRIAR 3 A has covered with a price on PriceABS in the past three months - at 99.95 on 12 February.

Secondary markets

US CLOs steady

The US CLO secondary market looks to have stabilised but remains fairly quiet.

"It seems like things have stabilised since the January widening," says one trader. "However, it was very slow yesterday and looks like it will be slow again today and probably for the remainder of this week heading into ABS Vegas."

The trader continues: "Everyone is now looking for a new issue print to give the market some direction. It seems like a few deals are close and that will set the tone across primary and secondary going into the conference, where everyone will be looking for more colour."

There are currently four BWICs on the US CLO calendar for today. The largest is an 18 line $80.79m 1.0 and 2.0 triple-A mix due at 13:30 New York time.

The list comprises: ACASC 2007-1A A1, APID 2007-5A A1S, ARES 2013-1A A, ATRM 7A AR, AVLN4 2012-1A AR, BABSN 2007-1A A1, BLUEM 2012-1A A, CIFC 2012-2A A1R, DRSLF 2011-22A A1R, DRSLF 2012-25A A, GOLD7 2013-7A A, INGIM 2012-1A A1R, LCM 10A AR, LCM 12A AR, OZLMF 2013-3A A1, SYMP 2012-8A AR, TICP 2014-1A A1 and TPCLO 2013-1A A1.

Six of the bonds have covered with a price on PriceABS in the past three months - ARES 2013-1A A at 98H on 26 January; AVLN4 2012-1A AR at 99.625 on 2 December; GOLD7 2013-7A A at M97H on 26 January; INGIM 2012-1A A1R at 99.7 on 2 December; LCM 10A AR at 99.71 on 1 December; and TPCLO 2013-1A A1 at 98.28 on 26 January.

Secondary markets

Euro secondary mixed

The European securitisation secondary market continues to experience mixed fortunes.

"Liquidity remains very thin overall," says one trader. "However, there is still demand in the prime area, particularly in Dutch paper and yesterday we also saw some for Italian bonds."

At the same time, the trader adds: "Sterling sellers have started coming in. There wasn't a big incidence in UK prime, but in non-prime and buy-to-let there were notable flows."

Meanwhile, CLOs remain challenging the trader says. "The sector continues to wait on new issues for guidance but we are seeing some colour in secondary at last. Triple- and double-Bs appear to have stabilised but we saw single-As cover yesterday in the 400s so they're still moving wider. Some double-As went through yesterday in the 240 area, which is OK, but CLOs as a whole appear to still be quite weak."

There are currently five BWICs on today's European schedule for today, primarily involving CMBS and CLOs. The largest list is a €49.445m collection of five triple-A CLOs due at 15:00 London time.

The list consists of: ALME 2X A, CADOG 5X A1, CGMSE 2014-1X A, CGMSE 2014-3X A1A and HARVT 8X A. None of the bonds has covered with a price on PriceABS in the past three months.

Secondary markets

US CLO spike

The US CLO secondary market is seeing a spike in activity today.

"Today is busier as month-end combines with sentiment being a bit better," says one trader. "We're seeing more bidders and better depth of trading, although liquidity is still thin, tiering is significant and the macro picture isn't great - CLOs rallied in line with high yield yesterday, but that's gone out again today."

The trader continues: "There are quite a few BWICs today and they involve a lot of bonds but much of what's out there is in small size and most lists aren't from perceived significant sellers - everyone knows many of these guys have a lot more to sell. So, most of what's in for the bid is subject to negotiation and is just being put out there to see what they can attract."

Despite appearances the CLO market is still seeking direction and irrespective of the macro picture still has to clear a lot of barriers, the trader suggests. "For example: the decline in equity is leaving a large number of bonds with double- and single-Bs uncovered; the loan market is struggling and its new issue pipeline is bleak; and the CLO secondary arb isn't there to generate primary supply."

Consequently, the improved sentiment and flurry of activity may not last. "When you put decent bids out you get run over - there's a lot of sellers at the right price now," says the trader.

There are currently eight BWICs on the US CLO calendar for today. The largest of those still to trade is a 12 line $23.8m combination of 2.0 double- and triple-Bs due at 13:30 New York time.

The list comprises: CECLO 2013-17A C, DEN11 2015-1A D, DRSLF 2013-26A E, DRSLF 2014-36A E, DRSLF 2015-37A E, GALXY 2013-15A D, GALXY 2013-16A D, GWOLF 2013-1A C, JTWN 2015-6A D, LCM 13A E, OAKC 2013-8A D and OCTLF 2014-1A E. None of the bonds has covered on PriceABS in the past three months.

In addition there is a 24 line mixed vintage double-A to double-C CDO and CLO OWIC due by 14:00. It involves $1m-$3m each of: AIMCO 2014-AA C2, APID 2013-15A E, APID 2014-18A E, ARES 2013-1A C, CDAR 2013-1A F, CECLO 2013-20A B2, CECLO 2013-20A C, CECLO 2014-21A D, DRSLF 2013-30A C, EATON 2013-1A D, EATON 2014-1A E, FLAT 2011-1A E, FLAT 2012-1A D, FLAT 2014-1A D, HPCDO 2006-1A A1, HPCDO 2006-1A A2, HPCDO 2006-1A B, LCM 14A F, MHAWK 2014-3A C, OZLM 2014-7A B2, REGT3 2014-1A D, SYMP 2013-12A F, TICP 2014-3A B2 and WOODS 2014-12A C.

Secondary markets

Euro ABS/MBS softens

Weaker wider markets have softened the tone across the European ABS/MBS secondary market.

Broader market volatility continues to keep liquidity thin and investors for the most part are only appearing as sellers. Consequently, secondary tone weakened again yesterday. Nevertheless, light flows and selective buying from the Street, albeit in very low volume, was enough to keep most secondary spreads unchanged.

However, results from the BCP tender were only announced after the close, with the acceptance of €280k of MAGEL 2A and none of MAGEL 3A being met with disappointment. Unsurprisingly Portuguese paper has opened this morning wider at around pre-tender levels.

There are two BWICs on the European schedule for today. One involves a mixed bag of small clips and the other is a three line Spanish seniors list due at 12:00 London time.

The latter comprises: €10m BFTH 6 A, €14m TDAC 5 A and €10m TDAC 7 A2. Two of the bonds have covered on PriceABS in the past three months - BFTH 6 A at M97 on 12 January and TDAC 5 A at 93.45 on 25 November.

Secondary markets

Euro CLO comeback?

Increasing activity could be a sign of a return to form for the European CLO secondary market, but it is only early days.

"There are signs that the market is coming back, but there's still a long way to go and real money is still sitting on the sidelines," says one trader. "There's been bit more two-way flow in the past couple of days with a lot less BWIC supply to push prices down and encouragingly a few more new issues in the US are coming through."

Where there is activity, it remains highly selective, the trader reports. "We've been seeing action around 2.0 triple-Bs and now also in double-Bs. At the same time, there is still some demand for short-dated 1.0s."

There is currently one CLO BWIC on the European calendar for today - a circa €2.5m current face two line list due at 13:30 London time involving HARVT IV A2 and HEC 2007-3X A. Only HEC 2007-3X A has covered on PriceABS in the past three months, last doing so at 97.5 on 26 January.

Secondary markets

Euro secondary slips

Activity and pricing levels have slipped further in the European securitisation secondary market.

Yesterday saw further weakness in Portuguese paper as the aftermath of the BCP tender pushed bonds out further during the session after they had opened wider on the previous day's close. Also in peripherals, yesterday's Spanish seniors BWIC only partially traded.

Meanwhile in core assets spreads are generally holding up but Brexit fears continue to ensure a weaker tone in sterling paper. Overall, liquidity remains extremely thin with sellers having the edge in limited two-way flows.

There is currently only one BWIC on the European schedule for today - a £15.4m four line auto ABS and RMBS mix due at 11:00 London time. It comprises: ECARA 2 B, PARGN 19 B, PARGN 20 B and TURBF 4 B.

Two of the bonds have covered on PriceABS in the past three months - ECARA 2 B at 99.58 on 20 January and PARGN 19 B at 98.18 on 23 February.

Structured Finance

SCI Start the Week - 22 February

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

Pipeline
Pipeline entrants were dominated by ABS issuers last week. A handful of CDOs/CLOs and CMBS deals also began marketing.

Auto ABS continues to be well represented, with the US$1.02bn Ally Auto Receivables Trust 2016-2, US$810.82m Ford Credit Auto Owner Trust 2016-REV1 and US$1.25bn Toyota Auto Receivables 2016-A Owner Trust transactions newly announced last week. Consumer ABS deals comprised US$140.9m Citi Held for Asset Issuance 2016-MF1 and US$179.68m Lendmark Funding Trust 2016-A. These were rounded out with US$756m John Deere Owner Trust 2016, €1.01bn Multi Lease AS 2016 and US$382m Utility Debt Securitization Authority Restructuring Bonds Series 2016A.

The CDOs/CLOs entering the pipeline consisted of: US$358.28m Denali Capital CLO XII, US$500m Madison Park Funding XX, US$360m Neuberger Berman CLO XXI and US$3475m Trust Preferred Insurance Note Securitization 2016-1. The CMBS included US$640m COMM 2016-787S, US$833m JPMBB 2016-C1 and US$666.6m MSCI 2016-UBS9.

Finally, the US$100m Manatee Re 2016-1 catastrophe bond was also announced.

Pricings
Similarly, auto ABS dominated last week's pricings, along with three CMBS and one RMBS.

The auto ABS prints included: US$556m ARI Fleet Lease Trust 2016-A, US$972.08m GM Financial Automobile Leasing Trust 2016-1, US$1.025bn Honda Auto Receivables 2016-1 Owner Trust and CNY2.71bn Rongteng 2016-1 Retail Auto Mortgage Loan Securitization. A consumer ABS - the US$124.8m Oportun Funding II Series 2016-1 - also priced.

Last week's new issue CMBS were US$765m 225 Liberty Street Trust 2016-225L, US$955m MSBAM 2016-C28 and US$875mn WFCM 2016-NXS5. The RMBS print was the US$1.23bn-equivalent Silverstone Master Issuer Series 2016-1.

Editor's picks
Governmental intervention test resolved: The three-judge external review panel convened by ISDA in connection with the Novo Banco governmental intervention credit event (GICE) question (SCI 29 January) has ruled that CDS referencing Novo Banco were not triggered on 29 December 2015 when the Bank of Portugal re-transferred five senior bonds back to Banco Espirito Santo. This marks the first time that the external review process has been used by ISDA's EMEA credit derivatives determinations committee and the first test of the GICE, which was added to the 2014 ISDA credit derivatives definitions to address regulations for resolving failing financial institutions...
CMBS spread widening to continue? An analysis of previous US CMBS corrections undertaken by Morgan Stanley CMBS strategists suggests that the current sell-off in the market is not as pronounced, despite it being the longest on record. The study indicates that while there may be periodic tactical rallies, CMBS spreads can continue widening for four primary reasons until the S&P 500 index troughs...

Deal news
• Net operating expenses for most single-family rental (SFR) securitisations issued in 2013 and 2014 are slightly above underwritten assumptions, which Moody's describes as slightly credit negative for the affected transactions. Exceptions to this trend are the Invitation Homes (IH) and Silver Bay deals.
• US CMBS delinquencies posted the largest month-over-month decline in January since Fitch began tracking the segment 15 years ago, reflecting the resolution of the Stuyvesant Town/Peter Cooper Village asset (SCI passim). Loan delinquencies fell by 109bp last month to 2.93% from 4.02% at end-2015, while the dollar balance of late-pays fell by US$4.2bn to US$11.1bn.
• Banco Comercial Português has launched separate tender offers for the respective €930m and €1.41bn class A notes of Magellan Mortgages No. 2 and No. 3. The bank says the purpose of the offers is to proactively manage its outstanding liabilities and capital base.
• Fannie Mae has priced its latest credit risk sharing transaction under the Connecticut Avenue Securities series. To promote additional liquidity, the GSE for the first time sought a credit rating for the M2 bonds in a CAS transaction. It is also for the first time selling a portion of the first loss position, further reducing taxpayer exposure to credit losses.
• Kroll Bond Rating Agency has designated US$684m of CMBS 2.0 oil exposed loans in both KBRA-rated (21) and non-rated transactions (seven) as KBRA loans of concern (K-LOCs). Among the agency's rated transactions, North Dakota and Texas include collateral with oil-exposed K-LOCs. Oklahoma and Colorado have also been identified with oil-exposed K-LOCs in non-KBRA rated transactions.

Regulatory update
• The European Parliament has begun discussing the EU's securitisation initiative, comprising the new securitisation regulation and the amendment to the CRR. Approval by the parliament is the last major step towards implementation of the rules and follows the European Council's approval of the package in December (SCI passim).
• A new Russian bankruptcy law that came into effect in October 2015 will only impact a limited number of ABS and RMBS in the country, Moody's reports. The law introduces a legal mechanism for individual debt restructuring and encourages lenders to devise repayment plans rather than sell the assets in the event of a borrower's bankruptcy.
• The EBA has published its final draft implementing technical standards (ITS) for the mapping of external credit assessment institutions' (ECAIs) credit assessments for securitisation positions. The ITS will be part of the EU's Single Rulebook for banking and insurance, and will allow securitisation credit ratings to be used for the calculation of institutions' capital requirements.

Deals added to the SCI New Issuance database last week:
Agate Bay Mortgage Trust 2016-1; BMW Vehicle Lease Trust 2016-1; CAS 2016-C01; CGCMT 2016-GC36; CNH Equipment Trust 2016-A; Enterprise Fleet Financing Series 2016-1; First Investors Auto Owner Trust 2016-1; Ford Credit Floorplan Master Owner Trust A Series 2016-1; FREMF 2016-KLH1; GreatAmerica Leasing Receivables Funding Series 2016-1; Michigan Finance Authority series 2016-1; MSBAM 2016-C28; MSC 2016-PSQ; PFS Financing Corp series 2016-A; Santander Drive Auto Receivables Trust 2016-1; Silverstone Master Issuer 2016-1; WFCM 2016-C32; XXIII Capital Financing 1.

Deals added to the SCI CMBS Loan Events database last week:
CGCMT 2014-GC23; COMM 2014-LC17; CSFB 2005-C1; CSMC 2006-C5; CSMC 2007-C5; ECLIP 2007-2; EURO 23; GSMS 2006-GG8; JPMBB 2013-C15 & JPMCC 2013-C16; JPMBB 2015-C29 & JPMBB 2015-C30; JPMCC 2006-CB17; JPMCC 2007-C1; JPMCC 2007-LD11; LBUBS 2004-C1; TITN 2006-1, TITN 2006-2, TITN 2006-3, TITN 2007-2 & TITN 2007-CT1; WFRBS 2011-C3.

Structured Finance

UK risk over-represented

Some €6.5bn of European ABS paper has traded off BWICs in the last nine months, according to JPMorgan figures, implying healthy secondary trading across the region. An analysis undertaken by European securitisation analysts at the bank shows that traded ratios remained above 70% for all bonds offered by sellers, with UK risk significantly over-represented in terms of collateral appearing on bid-lists.

Weekly volume of bonds offered over this period averaged €236m, with windows of elevated activity (typically in the second week of the month), which the JPMorgan analysts believe is linked to the provision of month-end marks. Notable spikes in activity - consistent with the timing of macro-stresses from Greece, China and VW - also suggest a desire among investors to trade bonds at certain times.

Specifically in the first few weeks of 2016, an average of circa €223m of weekly BWIC volumes emerged, with three of the first six weeks of the year seeing outsized volumes (in the range of €250m-€310m).

Net-net, 80% of bonds offered in a month tend to be sold to investors. However, the analysts note that there seems to be a natural cap on demand within a given period, with months of elevated BWIC volumes generally meeting with slightly lower trade conversions.

Asset managers have dominated BWIC activity over the analysis period, contributing 59% of the total volume put up for sale. Asset manager bid-lists have tended to be driven by end-investor redemptions.

Hedge funds were responsible for another 24% and notably appear to be particularly willing sellers since the beginning of 2016. The remaining 17% comprises of other institutions.

Some 56% of bonds traded were denominated in euros, while 42% were denominated in sterling, according to JPMorgan. In terms of seniority, 60% of the bonds traded comprised senior notes.

In terms of asset class, UK RMBS accounts 42% of paper traded over the period and appears to have suffered bouts of pricing pressure owing to a comparative over-supply. The next two largest segments outstanding are Dutch and Spanish RMBS, accounting for 10%-15%).

Focusing on the type of bonds traded within UK RMBS, a disproportionately high percentage of non-conforming paper has switched hands. Over 63% of all traded UK RMBS BWICs - or slightly above a fourth of all BWIC bonds - was comprised of NCF paper, largely representing the lightening of ABS portfolios held by the fast-money community.

CS

Structured Finance

Brexit implications weighed

The UK will hold a referendum on 23 June to decide whether to stay within the EU. Uncertainty about a potential 'Brexit' is expected to cause technical weakness in UK securitisation markets in the meantime.

JPMorgan European ABS analysts expect investors to demand increased risk premia to hold UK risk between now and June. Benchmark anchor markets are already pricing wider and this is expected to feed into weaker technicals around UK securitisation positions.

Originators are also expected to front-load new issues ahead of the referendum. This could lead to a very thin market for placing UK paper while the official referendum campaign - which starts 10 weeks prior to voting day - is underway.

Should the UK ultimately vote to leave the EU, formal exit negotiations could last years, prolonging market woes. Uncertainty during the transitional process would remain very high.

"In fact, our economists believe that UK growth could slow to 1% in the year following Brexit, and while they think that the downside risk of a subsequent recession can be avoided, this is contingent on well-managed post-referendum negotiations between the UK and its spurned former partners," say the JPMorgan analysts.

Prices for riskier securitisation assets would fall across the credit quality spectrum, following a vote to leave, believe the analysts. Trading volumes could become particularly thin as investors wait to see signs of stabilisation and secondary market price volatility could shut down primary issuance until at least the September issuance window.

"More gradually, we would expect the uncertainty engendered by the exit negotiation process to feed negatively into consumer confidence and ultimately into securitised pool performance. Consumer confidence and house price trends appear to be highly correlated, so we suggest that any prolonged period of uncertainty will likely harm current HPA trends, thereby affecting housing market churn rates," say the analysts.

Therefore, from an RMBS perspective, prepayments speeds would most likely be the first metric to deteriorate. Moderating GDP growth might, however, postpone tightening monetary policy and thus support mortgage borrower affordability.

Investors in UK master trusts would probably experience initial price deterioration, followed by a period of cooling prepayment speeds as uncertainty weighs on housing transaction volumes. "A more prolonged period of economic weakness could translate into deteriorating arrears and default metrics, although master trust positions are extremely well protected from this potential collateral pool deterioration, given their substantial subordination levels," the analysts say.

For pass-through bonds, technical weakness is expected to be followed by a deterioration in mortgage market activity rates as confidence weakens, which would directly impact investor cashflows. Buy-to-let pass-through positions could experience the least significant change in borrower cashflows due to the IO nature of the collateral and historically low prepayment speeds.

"Early vintage non-conforming positions with relatively stable post-reset prepayment speeds (and embedded HPA supporting refinancing) would also be less likely to see any notable diminution in CPRs, in our view. More recent vintage non-conforming deals, however, are likely to be the most directly affected by a fall in consumer confidence moderating house values (through the constraint on refinancing opportunities), with subordinate positions most exposed to fundamental collateral deterioration," say the analysts.

Should the UK vote to remain within the EU, the picture is more straightforward. The reduction in uncertainty should see investors look to add risk.

JL

Structured Finance

Puerto Rico counter offer criticised

A number of mutual funds that hold over US$10bn invested in Puerto Rico and its public corporations have warned against a counter offer made to the commonwealth's debt restructuring plan. In a letter to Puerto Rican House Representative Rafael Hernandez, OppenheimerFunds, Franklin Advisers and First Puerto Rico Family of Funds urge the commonwealth's legislature to maintain its current COFINA payment structure, which securitises Puerto Rico's sales tax revenue.

The letter is in response to one sent earlier this month by Goldentree Asset Management, MetLife and Whitebox Advisors, which proposed that the subordinate COFINAs would wait longer to get paid down. However, the latest letter warns against impairing these debt payments, highlighting some of the underlying differences emerging between Puerto Rico's various bondholders.

"Some speculative purchasers of Puerto Rico's debt - those who have purchased securities in recent months at substantial discounts - will try to offer band-aid solutions to Puerto Rico to help themselves make a quick profit at the expense of other creditors and, ultimately, at the expense of Puerto Rico itself," this letter reads. "Luckily, these speculative investors represent only a small portion of Puerto Rico's bondholders."

The move follows recent positive developments surrounding the bill for PREPA's debt restructuring deal, which has reportedly passed both the Puerto Rican House and Senate with approval. The Puerto Rico Aqueduct and Sewer Authority - otherwise known as PRASA - has also signaled its intent to venture into a similar securitisation plan to help finance the commonwealth's debt.

However, the letter outlines the funds' concern that pushing pack debt repayments would have a negative long-term effect on Puerto Rico's ability to securitise bonds. The funds therefore reiterate their support of the original payment plan set out, describing it as a 'super bond structure' and comparing it to the Municipal Assistance Corporation that was created to provide a viable financing mechanism for New York City during the financial crisis in the mid-1970s.

"Any attempt by the governor and his advisors to weaken the COFINA structure would seriously impair the commonwealth's ability to use the securitisation model to aid in its recovery, by undermining the commonwealth's ability to obtain investment grade ratings for the securitisation transactions contemplated for PREPA and PRASA, as well as any other similar transactions contemplated for the future," the letter adds.

JA

CDS

Long iTraxx positions 'vulnerable'

Net long non-dealer positions have been cut by almost US$17bn over the past week or so across the Markit iTraxx Main index, marking the largest two-week risk reduction for the series since early 2011, according to Bank of America Merrill Lynch European credit derivatives strategists. Should the downward trend continue, they anticipate that the current long CDS investor base will continue to erode.

As credit market risks have shifted from being predominantly idiosyncratic to more systemic over the past few months, longs have been added in CDS indices, despite credit funds being hit by outflows. The BAML strategists explain that investors have sought liquid products to allocate part of their capital to, adopting a buy-and-hold mentality for the underlying market and using CDS indices as a liquid alternative to cash bonds.

However, these CDS longs have proven to be quite vulnerable during the recent market turmoil. "This is not only because CDS indices will be the hedging instrument 'en masse' for credit investors, but also as investors that have been using CDS indices as a liquid long will be cutting risk. Such a risk reduction should hurt disproportionally CDS indices, we think. This long-risk base has been instrumental to support index outperforming intrinsics during the recent widening," the strategists observe.

Another reason why CDS indices are likely to underperform single name CDS, should spreads continue to widen, is due to rising systemic risk. Historically during periods of systemic risk, the index-to-intrinsics skew ranged on average from -6bp to +9bp, according to BAML figures.

However, despite the sizable risk reduction, the index-to-intrinsics skew has been averaging -5bp lately. Should the recent sell-off continue, the strategists consequently suggest that the iTraxx Main has another 10bp-15bp to underperform intrinsics.

Given that they believe any rallies will be shallow and that risks remain on the downside, the strategists indicate that bearish risk-reversals (for example, iTraxx Main 115bp versus 100bp) and put spread collars (115-145 versus 100bp) are optimal trades "to position for wider wides and wider tights".

CS

CLOs

CLO retention rules challenged

The LSTA yesterday testified in front of the US House Committee on Financial Services' capital markets subcommittee to extol the virtues of a 'qualified CLO' (QCLO) proposal as an alternative to the currently agreed 5% retention requirement. The association has also continued legal proceedings against the US SEC and the US Fed to challenge the 5% requirement.

The LSTA describes the QCLO as "a common sense solution that will permit CLO managers to meet the Dodd-Frank risk retention rules without causing material disruption to the industry". A QCLO would be a CLO which meets certain structure and collateral requirements and would only require a 5% stake in the equity tranche to fully satisfy risk retention (SCI 14 January 2014).

Deutsche Bank CLO analysts note that many CLOs would already qualify and that those which do not already qualify could be brought into line through relatively minor changes. This would reduce the investment that a manager is required to make in a CLO without imposing too many additional constraints on issuance.

"Clearly that would be a significant change in the risk retention rule as it applies to CLOs. There is, however, a long way to go and many political obstacles on the way to the bill passing into law," note the Deutsche Bank analysts.

The LSTA has also continued its legal case against the SEC and Fed in the Court of Appeals. The three central considerations are whether or not managers are securitisers, what constitutes 5% of the credit risk of a CLO and whether alternatives to the final rule were properly considered.

A development of note in the case is that one of the judges has already questioned the premise that a share in the first loss tranche in the amount of 5% of fair value of the entire CLO really does constitute 5% of the credit risk. This is because - as the LSTA has pointed out previously - the fact that the first loss piece is most exposed to losses means that 5% of fair value of that tranche represents more than 5% of the credit risk.

JL

Structured Finance

Lending harmony?

CMU set to transform SME investment landscape

Funding Circle is optimistic about the finalisation of the Capital Markets Union (CMU) and the possibility of a harmonised European regulatory framework to facilitate cross-border lending and investment. In particular, the firm believes that the regulatory package has the potential to transform the ability of investors on a global level to both invest in SME loans and securitise them.

After Funding Circle acquired ZenCap last year, it gained a presence in the Netherlands, Spain and Germany on top of its established UK and US bases. The platform therefore hopes to engage investors and borrowers across Europe on a retail and institutional level. However, the existing regulatory framework currently makes this kind of pan-European activity unattractive due to both complexity and cost.

From the perspective of boosting Funding Circle's activity and for the growth of the European economy, Sachin Patel, global co-head of capital markets at the firm, feels strongly that a simpler regulatory framework is vital. This is particularly true in terms of enabling firms to invest in SME loans through Funding Circle's platform and then securitising them if desired.

Patel states: "If investors could securitise Funding Circle loans and other investors could then invest in them globally without the potentially large costs, this would help to further diversify the capital available to small businesses on the marketplace."

He also highlights that development of the CMU has the potential to transform the ability of investors on a global level to both invest in SME loans and securitise them, opening them up to a wider market.

Of the CMU, Patel is optimistic about its potential for marketplace lenders and also in helping Europe rival the US. He says: "There is a real chance to build up our own capital market to match the US. By harmonising regulation from country to country, we can not only facilitate a stronger capital market, but also help build the European recovery."

In terms of the regulatory barriers standing in the way of global marketplace lending currently, the main issues are a fragmented tax framework across Europe, with different tax laws applying from country to country. One of the benefits of the CMU is that it might enable a standardised taxation framework, as well as streamlining anti-money laundering and 'know your customer' procedures.

In reiterating the investor benefits of removing pan-European regulatory barriers, Patel also suggests it could help to provide a buffer to a change in the credit cycle. He concludes: "Investors would love to have a globally diversified portfolio, including the rest of Europe and not just UK and US marketplace loans, and this could also provide a counter-cyclical stabiliser in the event of a downturn."

RB

Structured Finance

Solar effect

BBOXX ceo and co-founder Mansoor Hamayun answers SCI's questions

Q: How and when did BBOXX become involved in the securitisation market?
A: You need to look at the core of our business first, which is around designing, distributing and financing solar systems to improve access to energy across Africa and other parts of the developing world. Since 2010, we've sold 55,000 solar kits and impacted 275,000 lives across 35 countries.

These off-grid systems provide an alternative source of energy. The customer is the priority, so in return for paying a monthly contract between US$8 to US$20 a month, they get the necessary electricity, security and improved quality of life. Our target base is what would be considered the middle class of the population.

It's a growing market, but it is still a niche and the difficulty we have had is in attracting sufficient investment to help finance the business model. Investors have naturally viewed it as a risky option, particularly as it involves developing countries, new untested technology and clients with little or no credit history.

So this prompted us to bring to the market the first securitisation for off-grid solar assets called BBOXX DEARs, short for distributed energy asset receivables. These are contracts - with an average net value of US$300 - given to customers who have brought solar home systems, who then pay it off in installments.

The first issuance of notes was purchased by Oikocredit for US$508,000. The capital we generate from the sales can go to new solar home systems with limited grid electricity and the deal with Oikocredit will benefit an estimated 10,000 people across 24,000 households.

Q: What are your key areas of focus today?
A: We have put an emphasis on the accuracy of our data, since this is one of the key issues. We need to ensure to prospective investors that our customers are going to be reliable with their payments, but they want the evidence before they venture into this market.

We've generated over 12 years of data, which can help investors gauge and tackle any risk. It can show them that the customers have a low probability of default and a good repayment history. Our job is to look at the last 18 months of a customer's history and figure out how to use and present the data.

Q: How do you differentiate yourself from your competitors?
A: On the surface, it's very similar to other solar transactions in the market. With the mechanism, we have taken a mirrored approach to other players such as SolarCity, creating a high yielding, self-liquidating structure.

However, the main difference comes in the detail. We are selling to investors based on the time in the receivables not kilowatts-per-hour.

What they are investing in is what our very long-term predictions are going to be based on the data that we have generated from the customers. We get to these predictions by compacting a number of elements together.

Q: Which challenges/opportunities does the current environment bring to your business and how do you intend to manage them?
A: First, we want to get this current deal rated. The plan is to get it done within the next four to six weeks. But another key thing to note is that the deal was oversubscribed, so there is a clear hunger for this type of market in Africa. The demand has been so good that we need to star considering when the right time is to tap out. We also want to eventually issue listed deals. In this instance, there is going to be some strong consideration on factors such as liquidity and yield, as well as macroeconomic factors.

Q: What major developments do you need/expect from the market in the future?
A: Further issues are most certainly in the pipeline. We are looking to expand issuance progressively, and this starts with a US$10m to US$12m target in 2016. The next deal could be available by March.

However, one hurdle is to start tapping the capital markets and garnering the interest of institutional investors, which is difficult at this infancy stage. The other step is to generate positive talks with the Kenyan regulatory authorities to get a framework where we can eventually get a deal rated and/or listed. The groundwork is underway with these, so it will be interesting to see where we are a little further down the line.

Geographically, there is also nothing to say that this product cannot extend to other third world countries and continents. It's a market that can scale up to the billions with a bit of work. We've set the groundwork in place, so it will be exciting to see how far we can take it.

Outside of securitisation, our plan by 2020 is to provide 20 million people with electricity.

JA

Structured Finance

FSC, RiverNorth unlock horns

Fifth Street Finance Corp (FSC) has entered into an agreement with RiverNorth Capital Management under which RiverNorth will not contest FSC's slate of director nominees at its upcoming AGM. RiverNorth owns 8.7% of FSC's common stock and has previously criticised the way the firm is run (SCI 19 November 2015).

RiverNorth has also agreed to withdraw its binding proposal to terminate FSC's investment advisory agreement with Fifth Street Management. Further, it has agreed to abide by certain standstill provisions through FSC's 2017 AGM and also agreed to vote its shareholdings in Fifth Street Senior Floating Rate Corporation.

Structured Finance

Australian marketplace lender boosted

DirectMoney has partnered with Macquarie Bank in a deal where the bank will purchase A$5m of loans originated through the platform. As part of the partnership, the bank has also been appointed an adviser to the platform, with a view to assisting in building infrastructure to facilitate access to a wider range of capital markets investors.

One route to providing such access could be through securitisation - something the platform may explore further in the future. Peter Beaumont, ceo of DirectMoney, states that there is a "desire to establish a variety of loan distribution channels and I expect securitisation will play an important role for us."

As part of the partnership, initial fees will be paid to Macquarie through shares in the platform, as well as interest on the portfolio. The bank can acquire further shares subject to portfolio performance, but any rights to such shares will be capped at 10%.

Structured Finance

Marketplace data firm builds team

Marketplace lending analytics provider PeerIQ has hired Brian Roncoroni as head of sales. He is the firm's first sales executive appointment and will be based in New York.

Roncoroni was previously a senior sales executive handling key accounts at CoreLogic, SunGard and FactSet. He has also worked in Chicago at Franklin Templeton Investments and at Legg Mason.

Structured Finance

Antares recruits for SF push

Antares Capital has brought in Vivek Mathew as md, head of structured products. He joins from JPMorgan, where he served as md and head of the bank's global primary CLO business. Prior to that, he was vp, structured finance at Deutsche Bank.

"Vivek's experience in working with investors and ratings agencies will be important as our business considers the use of CLOs or other structured products as part of our holistic funding and liquidity profile," says Barry Giarraputo, cfo of Antares.

Structured Finance

Transportation pro hired

Pillsbury has recruited transportation and structured finance lawyer Jonathan Goldstein as partner in its New York office. Goldstein moves from Katten Muchin Rosenman, where he was also partner. He has additionally held roles at Shearman & Sterling as head of transportation finance and Milbank as senior associate.

Goldstein's practice focuses on a broad spectrum of international financial and corporate transactions across the transportation and other esoteric structured finance sectors. This includes public offerings, private securities placements, structured financings, various types of bank loans, leases, sales and resales, joint ventures and restructurings.

Structured Finance

Investment capabilities strengthened

Algebris Investments has appointed Alberto Gallo as partner and head of global macro strategies. Reporting to ceo and founder Davide Serra, he will take on both research and portfolio management responsibilities at the firm.

Gallo is tasked with building on Algebris' investment capabilities, diversifying beyond financials and expanding across global credit. Previously, he set up and headed the global macro credit research team at RBS, leading idea generation across credit markets. Before that, he was a global credit strategist at Goldman Sachs in New York, and initiated and ran the global credit derivatives strategy team at Bear Stearns.

Structured Finance

Demica beefs up

Demica has appointed Jen Collet, Giovanni Lazzeri and Karel Krejci as coo, director, origination and director, supply chain finance origination respectively.

In her new role, Collet will play a pivotal part in Demica's expansion, working closely with ceo Matt Wreford to support future corporate development. She will also lead the operational aspects of the business, ensuring optimum client service, building new value-added transaction services and managing key partnerships with financial institutions.

Collet has nearly 20 years of fintech experience in the US and Europe. Immediately prior to joining Demica, she was coo at OpenFin, and before that at ICAP post-trade risk and information services. She previously spent six years at ICELink in a variety of roles, culminating as global business manager and North American director.

Lazzeri will have responsibility for originating multi-jurisdictional securitisation and supply chain finance programmes for Italian and multinational corporates and financial institutions. As part of Demica's commitment to offering in-market accessibility to its clients, he will be co-located in Italy and London.

Lazzeri brings 22 years of structured finance and working capital experience from European investment banks to Demica. He joins the firm from Société Générale, where he spent 12 years covering a variety of securitisation roles across Europe, most recently taking responsibility for origination, structuring and execution of high profile domestic and pan-European corporate securitisation transactions with a focus on Italy.

Krejci will focus on originating supply chain finance programmes across Europe, building on Demica's recent significant investment in its technology platform to support non-investment grade clients and their large number of smaller cross-border suppliers. He has over five years' experience in supply chain finance and the procure-to-pay application software space, representing tech start-ups to Fortune 500 companies.

CDO

CRE CDO transferred

RE CDO Management has assigned its interest in the collateral management agreement for Sorin Real Estate CDO IV to Talmage. The issuer has also appointed Talmage as the successor advancing agent.

Moody's has determined that the proposed appointment of a successor collateral manager and successor advancing agent will not result in any adverse action with respect to any current ratings on the securities. The agency notes that Talmage acts as both a special servicer on Moody's-rated CMBS transactions and as a collateral manager on Moody's-rated commercial real estate CDOs.

For other recent CDO manager transfers, see SCI's CDO manager transfer database.

CDO

Disputed swaps case due

BNY Mellon Corporate Trustee Services and Citicorp Trustee Company have commenced proceedings in the English Commercial Court against Taberna Europe CDO I, Taberna Europe CDO II and the transactions' collateral manager Taberna European Capital Management. The proceedings have been brought by the claimants at the direction of the class A1 noteholder in each deal, Barclays Bank, regarding disputed swaps.

The claimants are seeking directions from the Court as to whether EODs have occurred and are continuing under the two transactions due to the entry by the issuers into swap agreements with Merrill Lynch International, pursuant to the terms of ISDA Master Agreements dated 31 January 2007 (confirmation dated 31 May 2007) and 13 September 2007 (confirmation dated 15 January 2008).

The issuers and the collateral manager filed evidence in response to the summary judgment application on 8 February. The application is scheduled to be heard in the High Court on a day between 2 and 4 March. If the order sought is granted, it is likely that an EOD will be called under the notes.

Insurance-linked securities

Alternative capital pro added

XL Catlin has appointed Daniel Brookman as alternative capital svp. He will report to Craig Wenzel, head of alternative capital, and will coordinate the firm's alternative capital activities in Bermuda. His initial responsibility will be to assist the continued build-out of New Ocean Capital Management's investment opportunities.

Brookman was previously head of capital markets at Montpelier Re. He has also held senior roles at Barclays, Benfield Advisory and Merrill Lynch.

ABS

Belgian SME deals 'strong performers'

Deals that are backed by loans to Belgian small businesses should emerge as one of the strongest performers in the European ABS market, says Moody's. This is due to both growth and deleveraging of such entities, which has improved their profit margins.

"Better financing conditions are helping business investment," explains Monica Curti, a Moody's vp and senior credit officer. "It's down to a combination of low interest rates, rising consumer confidence and households more comfortable with spending."

Belgium is the second largest market in EMEA for SME balance sheet securitisations by volume, despite its high concentration relative to other jurisdictions. Three deals account for the total outstanding loan pool in the Belgian SME ABS market: Esmee Master Issuer Series 0-2009-I, currently the largest European ABS SME transaction at €9.99bn; Belgian Lion SME II (€6.37bn); and Mercurius Funding (€2.74bn). In contrast, Spain and Italy have 40 and 31 outstanding deals respectively. 

In addition, Moody's says that arrears and default indicators in Belgian SME deals are below Europe's average. The 90- to 360-day delinquency rate out of the current balance is below 1% for Belgian transactions, compared to an average of 1.48% in the overall EMEA region. Moreover, the weighted average cumulative default rate stood at 1.56% as of December 2015, compared with an average of 5.92% for EMEA.

The Belgian rate is in line with the lowest SME non-performing loan ratios recorded in Europe. Moody's says that such indicators have seen strong performance from as far back as 2009.

The results are attributed to strong performance of Belgian ABS, lenders' strong eligibility criteria and the low indebtedness of Belgian companies compared with their European counterparts. Since the financial crisis, Belgian SMEs also have had relatively low refinancing risk and benefitted from some economic growth.

ABS

Healthcare loan ABS touted

New research by MIT Sloan professor Andrew Lo, Dana-Farber Cancer Institute's David Weinstock and MIT post-doctoral fellow Vahid Montazerhodjat puts forward securitised consumer healthcare loans (HCLs) as a way to help patients manage the often prohibitive costs of breakthrough therapies. Published in 'Science Translational Medicine', the paper says that HCLs could spread the cost of drugs and curative therapies over many years, making large healthcare expenditures more affordable. Financing HCLs through securitisation would provide more patients with access to the drugs, while generating attractive returns for investors.

"This is an instance where financial engineering could benefit the entire ecosystem," says Lo. "It helps patients by providing them with affordable access to therapeutic drugs and cures. It helps biopharmaceutical companies by enabling them to get paid back for the substantial investments in R&D they make to develop the therapies in the first place. And it helps insurance companies by linking payment to ongoing benefit."

Based on numerical simulations and statistical models, the research shows that a large, diversified fund of HCLs generated hypothetical annual returns of 12%. "As an investment, securitised HCLs have another important advantage - they are not likely to be highly correlated with the stock market," says Lo. "This makes them even more attractive for investors, such as pension funds, mutual funds and life insurance companies."

ABS

Subprime auto delinquencies near peak

US subprime auto ABS delinquencies hit a six-year high last month, according to Fitch. The rise has been driven by underperforming loans from 2013 to 2015 pools and has elevated losses in the sector.

The 60-day delinquency rate reached 4.98% in January, the highest since it reached the marginally lower level of 4.97% in September 2009. Lower credit quality within recent vintages has also been accompanied by a smaller number of used vehicles, both of which are prompting weaker performance within the sector.

Subprime 60-plus day delinquencies are trending closer to the peak index level of 5.04%, recorded in early 2009. Subprime annualised net losses (ANL) are also up 6.5% year-over-year and are expected to trend even higher in 2016 - closer to the 10% range.

Despite these figures, Fitch says that both prime and subprime auto loan ABS performance should improve in the spring, with the onset of tax refunds hitting US consumers. However, seasonal benefits will be more muted than in previous years.

Fitch only rates the two largest issuers in the subprime auto loan ABS sector, namely General Motors' AMCAR and Santander's SDART ABS programmes. Cumulative net losses on their recent 2013 to 2015 transactions are rising marginally, but remain well within the agency's expectations. It has consistently upgraded their subordinate bonds in 2015 and early 2016, as the transactions have performed in line with expectations.

Fitch continues to have a stable outlook for subprime auto ABS asset and ratings performance in 2016, despite softer performance trends. The agency expects ANL to rise to or surpass the 10% mark in 2016 as asset performance slows, but believes this should not have an impact on ratings performance this year.

Fitch took over 90 positive rating actions in 2015 across the prime and subprime sectors. This was up notably from 70 upgrades issued in 2014 and the second highest level of upgrade activity since 2007.

Structured Finance

Italian SME data differs

Significant differences exist between static vintage default data and empirical default rates used to validate internal rating models for Italian SME borrowers, says Fitch. The rating agency notes that vintage data typically understates default figures.

Fitch noticed this trend recently when rating Multi Lease AS, Siena Lease 2016-2 and Claris SME 2015. The first is a securitisation of lease receivables to Italian SMEs originated by Sardaleasing, which closed this week; the second was originated by Monte dei Paschi di Siena Leasing, which closed on 28 January; and the third is a securitisation of loans from Veneto Banca, which closed in 4Q15.

The vintage default data for the Multi Lease deal suggested an annual default rate of 3.4%, whereas the annual 90 days past due default rates observed for the last five years have averaged almost twice that at 6.5%.

The vintage default data for Siena Lease 2016-2 indicated an annual default rate of 3.7%. The observed 90 days past due rates averaged 6.7%.

The vintage default data for Claris SME 2015 suggested 0.7%. The observed rate was 6%.

Structured Finance

Negative Euribor risks highlighted

A continued decline of Euribor rates poses a number of risks to euro-denominated Australian RMBS and ABS, says Moody's. Deals that could be impacted are those that have no mitigants in place to withstand a negative interest rate scenario.

"As Euribor rates move further into negative territory - beyond the buffer provided by the note margins - such deals will need to make net payments to swap counterparties," says Alena Chen, a Moody's avp and analyst. "The payment outflows reduce excess cashflow and can result in insufficient proceeds to make required payments to other transaction counterparties and noteholders."

In a typical euro currency swap, the swap counterparty will make euro interest payments to the deal based on the index rate and margin, at a specified exchange rate. In a negative rate environment, if the all-in interest rate - the index plus the margin - is negative, then net monies are owed to the counterparty. In this case, the deal has to exchange additional cashflows to make the payments to the counterparty.

Moody's says that deals will only need to make net payments if the sum of the Euribor rate and note margin is negative. The higher the note margin, the larger the buffer it provides against negative Euribor rates.

Of the 13 Australian ABS and RMBS that are euro-denominated, four deals will likely have to begin net payments to the swap counterparty within three months. However, seven show sufficiently high margins on their notes to suggest that they will not need to make net payments. The remaining two deals contain structural features that would mitigate or eliminate any payment outflow to the counterparty.

CLOs

Top CLO managers unveiled

CIFC Asset Management remained the US leader in Moody's latest CLO manager league tables, managing 30 deals in 2H15. This follows a wider trend that saw little change from 1H15, with the major players across the US, Europe and globally still dominating the rankings.

Although CIFC topped the US tables by number of deals, Credit Suisse led by AUM with US$15.8bn worth of assets across 25 CLOs. Ares Management moved up by both deal count and AUM, while Pramerica Investment Management and Golub Capital Partners knocked Babson Capital Management off tenth spot. The pair tied for tenth place, following strong issuance in 2H15.

Meanwhile, Alcentra replaced GSO/Blackstone Debt Funds Management for the top spot in Europe by both deal count and AUM, managing €4.9bn of assets across 16 CLOs. Carlyle Investment Management closely followed Alcentra, with 14 deals totalling €4.7bn in AUM.

GSO/Blackstone was also knocked off the top spot as global CLO manager by Carlyle, which managed 41 deals with US$18.1bn in AUM. However, GSO/Blackstone still achieved second place by deal count. By number of deals, KKR also joined the top ten globally for the first time.

Credit Suisse and Carlyle lead the CLO 2.0 market by both deal count and AUM. Golub entered the top 10 among 2.0 managers by issuing six new deals worth US$3.2bn in 2015.

Meanwhile, the distribution of global market share between different-sized managers continues to shift due to strong issuance levels. By AUM, the top 10 managers accounted for 29% of outstanding CLOs that Moody's rates, which is a slight decline from a year ago. Excluding the top 10, the AUM of other large managers - those managing 10 or more deals - increased from 22% to 30%.

However, the US market share of smaller managers - those with between one and four CLOs under management - shrank to 14% in 4Q15 from 17% in 4Q14. In Europe, the 10 largest managers continue to control about 60% of the market, up only marginally from 1H15, but significantly higher than their 11% market share in 2014.

Moody's cites the volatile credit market and upcoming Dodd-Frank Act risk retention rule as drivers behind a decline in new CLO issuance in the US. The number of managers that issued in 2015 dropped to 84 from 98 the previous year. Fewer new managers entered the US market overall, while Tikehau was the only new entrant to the European market in 2015.

CLOs

Negative cash balance 'adds risk'

Negative trade date cash balances in European CLO 2.0 transactions could increase, says Fitch. The rating agency has observed an increasing number of deals reporting a negative trade date cash balance.

Fitch has contacted several CLO managers and collateral administrators to discuss the feature and its risks. In the rating agency's view, over-investing portfolios may expose noteholders to operational and market value risk. Theoretically, it may also expose noteholders to the risk that managers may use negative cash balances to influence OC tests.

On a positive note, negative trade date cash balances can substantially increase equity return in a negative interest rate environment, where positive cash balances may represent a liability for the equity noteholder.

CMBS

Loan mods hit seven-year low

The overall share of specially serviced US conduit CMBS loans decreased by 3bp to 6.77% in Q4 from 6.80% in Q3, according to Moody's latest CMBS and CRE CDO surveillance review. The share of specially serviced loans remains 595bp below the April 2011 peak of 12.72%, while only five loans totalling US$342.7m were modified last quarter, the fewest since 1Q09.

Moody's reports that the hotel sector saw an increase in construction last quarter, while the office and retail sectors continued to experience declines in overall vacancies. "In 2016 we expect to see continued low vacancy rates in the multifamily sector and the hotel sector to experience lower RevPar growth," says Moody's svp Keith Banhazl. "Meanwhile, the office and retail sectors continued to move in a positive direction in late 2015, though office vacancy rates will increase in small metros or submarkets that have concentrated exposure to the oil and energy sector, and retailers are increasingly being challenged by growth in online sales."

The agency's base expected loss for conduit/fusion transactions currently stands at 7.36%, down slightly from 7.46% in 3Q15, while its Commercial Mortgage Metrics (CMM) weighted average base expected loss decreased to 4.7% from 5.2%.

CMBS

Change in use eyed

Kroll Bond Rating Agency says it is monitoring the third largest loan in the US$830.7m JPMBB 2015-C27 CMBS, due to a potential change in use of the building. The loan - The Branson at Fifth - currently represents 8.8% of the aggregate transaction balance.

Substantive renovations are reportedly slated for the property that are suggestive of a change in use that would prompt KBRA to analyse the property cashflow using different assumptions than those applied at securitisation. This could result in changes to both the agency's KNCF and KBRA Value metrics.

It is speculated that a members-only private club will be situated at the property that will include 30 long-stay luxury residences. It is unclear whether the long-term residences will be converted from the subject's multifamily units or even if they will be situated at the location.

KBRA has contacted the servicer, Midland Loan Services, to learn more about the situation. "If the collateral units are being converted from existing multifamily, it may be the case that they have characteristics that are more akin to long-term lodging assets, which would warrant different assumptions regarding vacancy, expenses, below-NOI items, as well as the capitalisation rate we use to value the asset," the agency observes.

Upon receipt of more detailed information regarding the current and future status of the property, KBRA will re-analyse the loan and determine if watch placements and/or rating changes are warranted.

At the time of securitisation, The Branson at Fifth asset was a mixed-use 31-unit, 10-story mid-rise multifamily and 15,000 square-foot retail complex located on West 55th Street at Fifth Avenue, Manhattan. The apartments were 100% occupied and the retail space was leased in its entirety to Domenico Vacca, pursuant to a 10-year lease. Vacca intended to relocate his flagship store to this location in September and recently closed his boutique at the Sherry Netherland Hotel on Fifth Avenue.

CMBS

Maturity wave pay-offs projected

Morningstar Credit Ratings projects that paying off US CMBS loans on time will become progressively more difficult through 2017, as many of the maturing loans were aggressively underwritten near the peak of the market and remain overleveraged. Based on LTV ratios, debt yields and loan proceeds benchmarks, the agency predicts a decline in the 2016 maturity pay-off rate to 65%-70%, while the 2017 pay-off rate may slide below 60%, depending on the market's appetite for loans with borderline metrics.

The balance of CMBS loans scheduled to mature through 2017 continues to shrink, with US$80.49bn scheduled to mature in 2016, followed by US$103.29bn in 2017. This two-year total is down by 17.4% from US$222.48bn at the beginning of 2015.

The first year of the three-year maturity wave went well, with the 2015 pay-off rate for US$60.39bn of maturing CMBS loans ending at 84.9%. But 2016 marks the beginning of the two-year peak of the maturity wave.

About US$9.22bn of the loans due to mature this year have already paid off and US$312.9m of loans have defeased, leaving about US$70.95bn remaining.
Morningstar notes that 38% of the loans maturing this year, with a total unpaid principal balance of US$26.95bn, have LTVs greater than 80% and may have difficulty refinancing.

The agency's historical analysis indicates that an 80% LTV threshold is a reliable barometer of a loan's likelihood to successfully pay off on time. However, given the market's appetite for loans with higher leverage, the projected pay-off rate would increase to about 75% with an increase in the LTV threshold to 85%.

Weaker LTVs among retail and office property loans are a major concern, as the two property types face the greatest exposure with about 30% a piece by unpaid principal balance of the 2016 maturities. By combined unpaid principal balance, about 45% of the loans in each property type have LTVs greater than 80%.

Conversely, Morningstar expects loans with healthcare collateral (US$77.9m UPB) to have a better pay-off rate, as just 6.9% of the 2016-maturing loans backed by healthcare facilities have LTVs greater than 80%.

Based on a debt yield of 9%, the expected on-time pay-off rate for 2016 maturing loans is 63.9%. However, lowering the debt yield to 8% increases the successful on-time pay-off rate to 75.1%.

Similarly, the agency estimates that only 66.8% of 2016 maturities generate enough cashflow needed to successfully refinance the existing debt, assuming a conservative 5% interest rate and a 1.35x debt service coverage ratio. If the interest rate is lowered to 4.5%, an estimated 71.9% of loans maturing in 2016 could be refinanced.

Meanwhile, Morningstar estimates that US$103.29bn in performing CMBS will mature in 2017, 88% of which was issued in 2007. Unsurprisingly, 50.7% of loans maturing next year by UPB have LTVs greater than 80%. About US$7.9bn of them are specially serviced and are unlikely to successfully pay off without a loss.

Office collateral represents the bulk of 2017-maturing CMBS at US$34.91bn by UPB, while retail - representing 29.5% of the 2017 maturities - has the highest exposure to LTVs greater than 80%, at 56.1%. Based on a debt yield of 9%, about 52.9% of 2017 maturities by balance are expected to successfully pay off. Using a 8% debt yield, the on-time pay-off rate increases to 65.5% by balance.

Morningstar estimates that only 55% of 2017 maturities generate enough cashflow needed to successfully refinance the existing debt without additional borrower equity, assuming a 5% interest rate and a 1.35x DSCR. If the interest rate is lowered to 4.5%, 61.6% of loans maturing in 2017 could be refinanced without the borrower injecting additional capital.

CMBS

Delinquencies for oil-boom loans

Morgan Stanley CMBS strategists have identified eight US CMBS 2.0 loans totalling US$55m - all of which are secured by properties located in oil-boom regions - that turned delinquent this month. A further oil-exposed loan realised an appraisal reduction, according to February remittance reports, suggesting a potential loss.

The largest of the newly delinquent loans is the US$17.9m Eagle Ford asset, securitised in COMM 2014-LC17 (see SCI's CMBS loan events database). This loan is secured by three hotels located in Cotulla, Pleasanton and Pearsall (Texas), built in 2012 and 2013.

The borrower advised that the properties have financial issues, given that they are located in an area with high dependency on the oil and gas industry, and has submitted a proposal to the master servicer regarding a potential modification. The loan is due for January and February payment.

Meanwhile, the US$18.7m Strata Estate Suites loan - securitised in COMM 2013-CR10 - has been assigned an appraisal recution of US$9.6m. The loan is secured by two Class A corporate housing multifamily properties in Williston and Watford, North Dakota. Both properties became REO in October 2015.

Servicer commentary states that the Watford property is 83% leased and the Williston property is 67% leased. Neither of the assets are currently listed for sale.

Risk Management

Cross-border venue comparability assessed

ISDA has published a set of principles for achieving comparability determinations between US and EU trading platforms. The association believes that regulators should focus on broad outcomes and similarities rather than conduct granular, rule-by-rule comparisons of the two frameworks.

In the EU, MiFID 2 and the associated MiFIR will introduce a requirement for certain derivatives to be traded on EU trading venues. Trade execution rules are already in place in the US following the introduction of the SEF regime in October 2013 (SCI passim), and current rules only allow US persons to trade on platforms that have registered as SEFs.

"Both the US and the EU have developed comprehensive regulations on trade execution and trading platforms. Our analysis shows there are many similarities between the SEF rules in the US and MiFID 2/MiFIR in the EU, which will hopefully pave the way for the recognition of EU platforms. However, a lack of recognition could lead to fragmentation between US and European markets," says ISDA ceo Scott O'Malia.

ISDA believes that the CFTC, which oversees US SEFs, should follow the principles outlined in an IOSCO cross-border report and should focus on similarities when making comparability determinations. Should EU trading venues achieve the same objectives and protections as SEFs, the CFTC should exempt them from SEF registration and compliance, ISDA argues.

Risk Management

FRTB compliance tool debuts

Murex has released an extension of its MX.3 model, addressing the Basel Committee's final version of its fundamental review of the trading book (FRTB). The tool delivers capital calculations of the review's new minimum capital requirements that it set out last month (SCI 15 January).

MX.3 for Capital Charges: FRTB provides both the standard approach (SA) and internal model approach (IMA) in helping banks meet the Committee's 1 January 2019 compliance deadline. The tool adapts to a bank's infrastructure by offering an advanced integration framework for importing positions, sensitives or P&L vector.

For SA, the tool calculates the required curvature and sensitivities for all instruments, including complex exotic products. It also delivers packaged aggregation for the FRTB's bucketing rules, as well as the default risk charge and the residual risk add-on. Similarly for IMA, it computes stressed expected shortfall by risk factor and liquidity horizon, and non-modellable risk factors stress tests.

RMBS

Dispute framework benefits outlined

The new independent dispute resolution (IDR) process recently adopted by Fannie Mae and Freddie Mac could be particularly helpful for more quickly resolving representation and warranty (R&W) issues surrounding credit risk transfers (CRT), according to S&P. The agency says the process could expedite the determination of underwriting defects on reference obligations in CRT deals.

This could result in payments to investors that may have otherwise been significantly delayed or not made at all, had the parties proceeded to litigation. The result would support the purpose of the new IDR process - announced by the FHFA earlier this month (SCI 4 February) - which provides the GSEs and the loan sellers with the option of pursuing binding, third-party arbitration to resolve R&W disputes if not resolved through the standard appeals and escalation processes.

It is reportedly the final of a number of improvements made to Fannie and Freddie's R&W frameworks over the past several years. The GSEs expect most disputes to still go through their conventional appeals process, but the possibility that a select number will take the new IDR process would be significant.

S&P says that the IDR process is similar to the R&W enforcement structures found in post-crisis, private-label RMBS deals, which aim to avoid the lengthy delays and spiralling costs associated with litigation. These transactions generally include provisions allowing the parties to pursue third-party arbitration to address breach disputes that they cannot otherwise resolve.

Although the effectiveness of arbitration has yet to be tested in the post-crisis RMBS context, S&P believes the inclusion of arbitration provisions are an improvement over legacy RMBS structures that did not contain such features.

RMBS

Loan-level model introduced

JPMorgan has developed a new loan-level transition model for GSE residential mortgage loans, which aims to help investors better understand the relative value in credit risk transfer fixed severity and actual loss RMBS. Actual loss deals are expected to look better under the framework.

The Freddie Mac and Fannie Mae dataset contains loans issued from 1999 through 2014. Both datasets track performance through voluntary pay-off, repurchases or involuntary terminal events, such as short sale, deed-in-lieu and real-estate-owned sales beyond 180-day charge off.

The new model introduces changes to both prepayments and current-to-30 rolls, lowering cumulative default and loss expectations in some cases and increasing them in others. Further, prepayments have been re-aligned to better capture recent trends and flatter refinancing curves.

JPMorgan RMBS analysts note that there is a substantial difference between 180-day credit events and liquidations. Consequently, valuations will change for both traditional 180-day credit event/fixed severity GSE deals and actual loss deals.

The model shows that current-to-30 roll rates are higher for 2014 vintage collateral, but are roughly unchanged for earlier vintages. Prepayments are slower under the framework, which potentially increases cumulative defaults, all else being equal.

Finally, liquidation timelines are longer, due to modelling 180-day charge-off versus full liquidation. This results in lowers cumulative defaults on actual loss deals.

RMBS

Mortgage portfolio sale agreed

OneSavings Bank subsidiary Rochester Mortgages has entered into a mortgage sale agreement to acquire approximately £396m of UK residential mortgage loans from Deutsche Bank subsidiary DB UK Bank. Completion of the acquisition is conditional upon OneSavings Bank establishing an off-balance sheet securitisation vehicle, which will acquire approximately £374m of the portfolio. The bank will retain approximately £22m of the portfolio on-balance sheet to comply with risk retention requirements.

It will also act as the co-arranger, alongside Morgan Stanley, and master servicer of the securitisation. Deutsche Bank and its affiliates expect to purchase notes and residual certificates in the securitisation and may seek to sell them to third-party investors.

RMBS

Resi oil exposure eyed

The credit performance of oil and gas-focused metropolitan areas has worsened on a relative basis within several major residential securitisation types, Moody's reports. The deterioration correlates with rising unemployment and declines in home prices in those areas and affects legacy RMBS, single-family rental transactions and GSE credit risk transfer transactions.

"The weakening in credit performance is limited so far, but correlates with the rise in oil and gas-related rises in unemployment in those areas," says Moody's vp - senior credit officer Madhur Duggar. "Though too early to tell, the credit performance of transactions with higher exposure to metropolitan areas with concentrations of oil extraction and drilling businesses, such as Houston and Oklahoma City, could come under greater credit stress this year."

Delinquency rates declined in pre-2010 legacy RMBS deals between 2014 and 2015, but the decline was smaller for those metropolitan areas with higher exposure to oil and gas-related activities, Moody's research shows. More recently in 4Q15, the transactions have seen a moderate up-tick in delinquencies and those with greater oil and gas exposure have underperformed those without such exposure.

Similarly, SFR transactions with exposure to oil and gas-focused metropolitan areas are showing higher delinquency rates than those without such exposures. Though average delinquency and vacancy rates are performing within expectations, the average rates for properties located in oil and gas areas are worse than they are for those in non-oil and gas areas.

Finally, GSE credit risk transfer transactions have less exposure overall to oil and gas than SFR deals and are often also less exposed to oil and gas-focused areas, such as Houston, Texas.