Contents

Secondary markets

Euro secondary flurry

The European securitisation secondary market saw a flurry of activity on Friday.

After declining volumes throughout the week the final session saw an uptick thanks to impending month-end and anticipation of a quiet week ahead. The sectors that saw most activity were the usual suspects - prime assets and higher quality peripherals - with trades going through both on- and off-BWIC roughly in line with recent levels.

With many participants absent at ABS Vegas the next few sessions at least are likely to be quiet. There are currently no BWICs on the European schedule for today.

Secondary markets

Euro secondary positive

The European securitisation secondary market continues to stay positive in line with sentiment in wider markets.

"Market tone is pretty constructive after a few stable sessions in broader markets," says one trader. "Consequently we're seeing a few people now looking to add."

However, the trader continues: "Liquidity remains pretty thin and we're not seeing many BWICs. What action there is still focused around the senior part of the curve."

There are currently three BWICs on the European schedule for today. At 14:00 London time there is a two line €6.7m original face ABS and RMBS auction involving BERAB 2011-1 A1 and SLMA 2003-2 A5. Neither bond has covered on PriceABS in the past three months.

Also at 14:00 there is a dollar, euro and sterling mix of UK RMBS. The 28.93m eight line list comprises: AUBN 4 M, ERF 5 A, LGATE 2006-1X BB, LGATE 2008-W1X BB, NGATE 2007-1X BB, RLOC 2007-1A A3C, RMACS 2006-NS3X A2A and RMACS 2006-NS3X M2C. Only LGATE 2008-W1X BB has covered on PriceABS in the past three months - at 79.78 on 10 December.

At 15:00 there is a combination of Italian and UK odd lots totalling 4.815m across 10 line items. It consists of: ARMBS 1 A, 3 A, BERCR 8 A, CLAVS 2006-1 A3B, MPS 2X A2A, PMF 2014-1 A, SIENA 2010-7 A3, SIVIG 2012-1 A, SPF 2004-A A and VELAH 4 A2. Seven of the bonds have covered on PriceABS in the past three months, last doing so as follows: ARMBS 1 A at 100.7 on 7 January; BERAB 3 A at 100.533 on 18 February; BERCR 8 A at 97.855 on 22 February; PMF 2014-1 A at 98 on 10 February; SIENA 2010-7 A3 at 99.44 on 27 January; SIVIG 2012-1 A at 97.28 on 19 February; and VELAH 4 A2 at 98.31 on 12 January.

Secondary markets

Euro secondary improves

The European securitisation secondary market continues to improve as broader markets remain stable.

"The market is improving although yesterday was quiet overall," says one trader. "Tone is definitely better, but we're not yet seeing that much volume."

At the same time, the trader adds: "Prices are picking up albeit quite slowly. We're noticeably lagging wider credit in that respect."

Improvement was most clearly seen in the recent hot spots. "Peripherals saw some increase yesterday - Portuguese bonds were up one to two points; Spanish between a half and one; and Italian about a quarter point on the day," the trader says. "Prime assets remain stable to a bit better, though flows are still light."

Meanwhile, there are two areas that remain difficult, the trader notes. "UK non-conforming is struggling - we saw quite few BWICs yesterday, but there wasn't much transparency on clearing levels. Equally, CLOs are still looking for direction - all the indicators are positive and there has been some US new issuance, but European secondary is still trading close to its wides."

The trader expects today will see more of the same. However, there are no BWICs on the European schedule for today so far, though the calendar is growing strongly for the rest of the week.

Secondary markets

Euro secondary slows

This week's recovery in the European securitisation secondary market slowed yesterday.

Despite increasingly positive market sentiment the anticipated continued uptick failed to materialise yesterday and flows thinned once more. Nevertheless, the wider market story was sufficient to keep most secondary spreads flat to slightly tighter.

While a few buyers are in evidence sellers are now more elusive and BWICs are largely absent with the expected build up in auction pipeline yet to appear. An increase in primary or secondary supply could kick start the market once more, but seems unlikely until next week following a full return from Vegas.

There are currently two BWICs on the European calendar for today. Both involve CLOs - one consisting of triple-As the other of equity.

The former is due at 10:30 London time and amounts to €26.8m current face across six line items - ARESE 2007-1X A2, CELF 2006-1X A2, HARVT III-X B, HARVT V A2, QNST 2006-1X A1 and QNST 2007-1X A2. None of the bonds has covered with a price on PriceABS in the past three months.

The nine line €60.35m current face equity list is due at 15:00 and comprises: ARESE 2013-6X SUB, CELF 2006-1X F, CGMSE 2013-2X SUB, GROSV 2013-1X SUB, HEC 2007-3X F1, HEHDS 3A R, JUBIL 2014-14X SUB, RPARK 1X SUB and SPAUL 3X SUB. None of the bonds has covered on PriceABS in the past three months.

Secondary markets

Euro CLOs limited

The European CLO secondary market remains hampered by a lack of activity.

"There's nothing really happening this week and the Vegas conference hasn't helped," says one trader. "We're only seeing very limited trading and the few BWICs we've had over the past couple of days haven't shed much light on levels."

However, the trader adds: "There is a general sense of tightening thanks to wider markets. Though all that is really doing is making it less attractive for sellers with buyers still looking for last week's levels, which no longer make sense."

The one area of consistent interest remains 2.0 double- and triple-Bs, the trader reports. "They've both moved in 80-100bp from their wides and there's still demand there, though less so in the Triple-Bs as many think they have moved as much as they're going to for now and double-Bs look cheap in comparison."

There is currently one European CLO BWIC on today's schedule - a mix of lower mezz and equity due at 15:00 London time. The €14.5m eight line list comprises: ARESE 7X E, ARESE 7X SUB, DRYD 2014-32X E, DRYD 2014-32X F, HOLPK 1X D, HOLPK 1X SUB, JUBIL 2014-12X E and RYEH 1X F. Two of the bonds have covered with a price on PriceABS in the past three months - ARESE 7X E at 81H on 3 December and HOLPK 1X D at 89.66 on 17 December.

Structured Finance

SCI Start the Week - 29 February

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

Pipeline
The number of ABS deals joining the pipeline slowed last week. The distribution across sectors was the most even it has been this year, with three new ABS, two ILS, one RMBS, four CMBS and a CLO.

A$350m CNH Industrial Capital Australia Receivables Trust Series 2016-1, US$1.11bn Navient Student Loan Trust 2016-1 and US$551m SoFi Professional Loan Program 2016-A accounted for the ABS. The ILS were US$175m Akibare Re 2016 and US$250m Citrus Re 2016-1.

US$280m Nationstar HECM Loan Trust 2016-1 was the RMBS, while the CMBS were US$470m CARS MTI-1-MTI-7 Series 2016-1, US$806.2m COMM 2016-DC2, US$350m GSMS 2016-RENT and €317m Taurus 2016-1 DEU. The CLO was €412m Harvest CLO XV.

Pricings
ABS did, however, dominate the week's pricings. There were six ABS, one RMBS, three CMBS and three CLOs.

The ABS were: US$1.02bn Ally Auto Receivables Trust 2016-2; US$164.7m DRB Prime Student Loan Trust 2016-A; US$1bn Ford Credit Auto Owner Trust 2016-REV1; US$756m John Deere Owner Trust 2016-A; US$156.38m Tidewater Auto Receivables Trust 2016-A; and US$1.25bn Toyota Auto Receivables 2016-A Owner Trust.

€14.2bn Caixabank RMBS 1 was the RMBS, while the CMBS were US$640mn COMM 2016-787S, US$1.02bn JPMBB 2016-C1 and US$667mn MSC 2016-UBS9. The CLOs were US$505m Madison Park Funding XX, US$499m Magnetite XVII and US$362m Neuberger Berman CLO XXI.

Markets
There continued to be spotty demand and inconsistent pricing for US ABS that are not considered cash surrogates, say JPMorgan analysts. They add: "We expect ABS spread movements and investor demand to continue to primarily reflect the liquidity perception, rate expectations and global growth fears in the near term. By June, we hope that the Fed will be able to calm the waters and that a rate hike provides room for ABS spreads to tighten."

US agency RMBS spreads are now pricing in the highest option cost seen in recent years, note Citi analysts, with February speeds released next week which will provide a glimpse into convexity. "With the spring purchase supply approaching fast, MBS markets will be highly dependent on the banks to absorb increasing supply. So far this year the banks have been largely absent from the MBS market, but we see signs of conforming loan retention picking up in 2016, which could lower MBS supply," they say.

Editor's picks
Mortgage movers: 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...
Drifting out: As markets sell off and become increasingly volatile, European high-beta securitised paper has widened considerably. This has been driven by several factors - not least regulation - and has concerning implications for liquidity and the future health of the market...
Downgrade possible: 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...
Stabilisation sought: 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...
Solar effect: BBOXX ceo and co-founder Mansoor Hamayun answers SCI's questions...
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...

Deal news
• 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.
• 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.
• 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.
• 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. The largest of the newly delinquent loans is the US$17.9m Eagle Ford asset, securitised in COMM 2014-LC17.

Regulatory update
• 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.
• 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.

Deals added to the SCI New Issuance database last week:
ARI Fleet Lease Trust 2016-A; BlackRock European CLO I; Driver Japan Five; GM Financial Automobile Leasing Trust 2016-1; Honda Auto Receivables 2016-1 Owner Trust; JPMCC 2016-ATRM; MSC 2016-UBS9; Multi Lease AS; NewStar Commercial Loan Funding 2016-1; Oportun Funding II Series 2016-1; WFCM 2016-NXS5

Deals added to the SCI CMBS Loan Events database last week:
CD 2006-CD3; CGCMT 2006-C4; CMLT 2008-LS1; COMM 2013-CR10; COMM 2013-CR11; COMM 2013-CR12; COMM 2014-CR14; COMM 2014-CR15; COMM 2014-CR19; COMM 2014-LC15; COMM 2015-CR²3; CSMC 2006-C3; CSMC 2007-C5; DECO 2006-E4; GSMS 2011-GC3; GSMS 2011-GC5; GSMS 2012-GC6; GSMS 2014-GC18; JPMBB 2015-C27; JPMCC 2005-LDP4; JPMCC 2006-CB16; JPMCC 2006-LDP7; JPMCC 2013-C10; LBUBS 2006-C1; Logistics 2015 UK; MESDAG CHAR; MLCFC 2006-3; MSC 2012-C4; TITN 2006-3; UBSBB 2013-C5; WBCMT 2005-C21; WFRBS 2011-C5; WFRBS 2014-LC14

CLOs

Interest diversion cushions assessed

Jamestown CLO IV is thought to have become the first post-crisis US CLO to fail its interest diversion (ID) test - by 32bp. Wells Fargo figures show that 12 post-crisis US CLOs now have less than 100bp of ID cushion, seven of which are from the 2014 vintage and four are 2013 vintage.

CLO strategists at the bank note that these CLOs have: a median 2.3% defaulted balance (the market median is 0.19%); a median exposure of 17.2% of loans priced below 80 (10.3%); a median exposure to oil and gas of 5.3% (3.7%); and a median exposure to metals and mining of 3.8% (1.7%). Five of the deals are failing one of their triple-C bucket tests.

"The 12 CLOs have an ID test limit 11bp tighter than the median post-crisis limit," the Wells Fargo strategists observe. "The median minimum OC cushion for these 12 deals at the first payment date was 440bp, 9bp lower than the median post-crisis deal. In the past six months, these CLOs bought at a median price of US$99.2, slightly below the market median buy price (US$99.3); and sold at US$99.2, below the market median (US$99.4)."

Ten of these CLOs are also the only post-crisis CLOs with less than 200bp cushion on their minimum OC tests. The median minimum OC cushion across these transactions is 133bp, compared to a median across all post-crisis US deals of 424bp.

Over 60% of post-crisis US CLOs have seen a drop in minimum OC cushion since their first payment, with a median drop of 21bp, according to the Wells Fargo figures. Among deals that have lost cushion, the median decline was 60bp, while gainers posted a median gain of 22bp.

The strategists cite four causes for low ID cushions: poor collateral performance, sector allocation, slightly tighter tests and a lack of par building. It also appears that manager experience can affect ID cushion: managers with less than 10 post-crisis deals have a median ID cushion of 314bp, 27bp less than the median cushion of managers with 10 or more post-crisis CLOs.

Additionally, managers with 10 or more deals have outperformed in terms of OC cushion preservation, with a median OC loss since first payment of 4bp. Managers with less than 10 deals have lost a median of 46bp in minimum OC cushion.

CS

CMBS

First CMBS 2.0 loan sees loss

February US CMBS 2.0 remittances show that 15 loans totalling US$103m became newly delinquent during the month, while eight loans totalling US$104m transferred to special servicing and 189 totalling US$3bn were watchlisted. A 2011-vintage loan became the first CMBS 2.0 asset to liquidate at a significant loss.

The US$12.4m Campus Habitat 15 loan (securitised in WFRBS 2011-C3) was last month resolved with a loss of US$7.1m (57% severity). Morgan Stanley CMBS strategists note that the loss was a surprise, as the loan was current and the property had no appraisal reduction, although the borrower filed for bankruptcy in late 2013.

The asset is owned by Troy Property Group, which operates student housing complexes throughout the US. The firm's Carbondale, Illinois location was closed in 2011 following multiple citations and violation notices regarding health and safety. Its Vincennes, Indiana location was foreclosed upon by First Financial Bank in May 2013.

Among the loans turning delinquent last month, eight are secured by properties located in 'oil boom' regions (SCI 23 February). Another delinquency of note was the US$11.5m Pathmark Staten Island loan (securitised in WFRBS 2012-C7), which has been affected by A&P's Chapter 11 filing. A total of 45 loans with a balance of US$470m were delinquent in February, resulting in a delinquency rate of 21bp, according to Morgan Stanley figures.

Meanwhile, the newly specially serviced loans included a 2015-vintage loan - the US$23m 88 Hamilton Avenue asset (WFCM 2015-NSX2) - where the borrower Seaboard Realty has filed for Chapter 11 bankruptcy protection. After signs of financial trouble, two of the three principals of Seaboard Realty opened an investigation, forced the resignation of ceo John DiMenna and hired an outside restructuring officer. The Morgan Stanley strategists note that there is no indication that the collateral's value has deteriorated in any capacity at this time.

In total, 59 2.0 loans with a balance of US$770m were specially serviced in February, resulting in a specially serviced rate of 32bp.

Among the highlights of February's watchlisted loans is the US$71.5m 333 North Central Avenue (JPMBB 2015-C28), where the property is 99% leased to mining company Freeport McMoRan Corp, which was recently downgraded from Baa3 to B1 by Moody's. In total, 1,057 loans with a current balance of US$16.8bn are on the watchlist, resulting in a watchlist rate of 7.37%.

Last month 30 loans with a balance of US$655m paid off, bringing the total to 310 loans with a balance of US$7.1bn. The largest loan to pay off - with approximately six points of yield maintenance - was the Veritas Multifamily Portfolio, with US$101m securitised in JPMBB 2013-C15 and US$78.6m securitised in JPMBB 2013-C16 (see SCI's CMBS loan events database).

Finally, 15 loans with a balance of US$196m were defeased in February, bringing the total to 231 loans with a balance of US$4.5bn. The largest loan to defease was the US$51m 1700 Market Street asset (UBSCM 2012-C1).

CS

Insurance-linked securities

UK ILS consultation opens

HM Treasury has opened a consultation on its proposal for a new regulatory and tax framework for ILS in the UK. The proposal covers a range of issues, including the necessity for a Solvency 2-equivalent framework and the authorisation of insurance SPVs.

The Treasury's paper explains that the proposals are part of an "initial" outline and could be tailored further down the line. As a result, its current consideration of SPVs focuses only on the most common forms of ILS deal - collateralised reinsurance and catastrophe bonds.

The paper also covers plans for a corporate structure on ILS SPVs, as well as taxation considerations. With the latter, it notes that it will seek to compete with established jurisdictions such as Bermuda and Guernsey by applying similar tax treatment. As an example, it cites a plan that would involve taxing investors on their share of the vehicle's income and minimising direct tax loss in the vehicle.

The consultation follows last year's announcement by UK Chancellor George Osborne to work with the UK Prudential Regulatory Authority, FCA and the London insurance market to design a new ILS-focused framework for the country (SCI 23 March 2015). The project is being described as aiming to help the UK maintain its position as a leading global hub for specialist reinsurance.

The London Market Group has responded to the news of the consultation, describing it as "great progress" in the goal of creating an innovative environment for ILS in London. The group has played a key advisory role in assisting with the development of a market, including heading the first official ILS industry taskforce meeting with HM Treasury representatives last summer (SCI 9 June 2015).

"The consultation is a key element of the legislative development process that we hope will mean the new ILS framework becomes law by the end of 2016," says Malcolm Newman, ceo of SCOR's Paris-London Hub and sponsor of LMG's ILS Working Group. "This document covers the key issues that need to be resolved: regulation and authorisation, corporate law and finally taxation - and it gives a very clear basis for an industry response."

Newman says that LMG's taskforce will be actively involved in the consultation and invites interested parties to join the discussions. "The government has listened to our requests and responded very proactively; it is now time for the insurance sector to play its part to help bring ILS business onshore to the London market," he adds.

The consultation will run until 29 April.

JA

RMBS

Foreclosure precedent set

A recent ruling by the California Supreme Court affirming the right of mortgage borrowers to continue challenging foreclosures years after a securitisation has closed will be credit negative for pre-crisis RMBS, says Moody's in its latest Credit Outlook. The rating agency warns that the ruling leaves an open door for other borrowers to press similar claims of void mortgage assignments and wrongful disclosures.

The court made its ruling in Yvanova v. New Century Mortgage Corporation on 18 February. It says that a borrower can challenge a non-judicial foreclosure sale by alleging that there was a break in the chain of assignments of the beneficial interest in the deed of trust and that a sale was therefore void.

The plaintiff in that case alleged that because Morgan Stanley assigned her mortgage into a trust several years after the RMBS transaction's close in 2007, the assignment was void and without legal effect. Defendants, including the RMBS trust and trustee Deutsche Bank, argued that such later assignment steps are merely 'confirmatory' of earlier transfers.

"This decision strikes down a long line of decisions that stood for the proposition that defaulting borrowers lacked standing to challenge such assignments," says Robert McWhorter, attorney at LeClairRyan. "This decision may increase the filing of wrongful foreclosure actions against lenders, challenging the validity of the assignments based on alleged violations of pooling and servicing agreements by lenders."

Although Moody's believes that RMBS trusts will be able to defeat follow-up challenges, it notes that the ruling will make suits more difficult and time consuming to defend. This will increase legal expenses for trusts and will potentially extend liquidation timelines.

The court's decision did not address other defences which could be put forward on behalf of the RMBS trusts. One such defence could include the principle that ownership of a mortgage note, and not the assignment of mortgage, is the key determinant of which entity has the authority to foreclose.

"Although the court itself called its ruling a narrow one, the implications are quite wide: many courts look to California for legal leadership, so this case could have national ramifications," adds McWhorter.

Lower courts will now be expected to determine whether potential plaintiffs can move forward with similar allegations. Moody's believes many homeowners that have been through foreclosures are unlikely to take actions to pursue wrongful-foreclosure claims.

However, the court's lack of clarity on whether borrowers can or cannot seek to pre-emptively block foreclosures will still prompt a rise in pre-crisis RMBS trust expenses. A more dramatic set of issues that would boost losses could emerge if title insurers become wary of issuing policies on foreclosed properties owing to the ruling, but Moody's is not aware of this yet being the case.

JA

Structured Finance

P2P cut-back

Market consolidation dominates discussion

As marketplace lending continues to rapidly evolve in Europe, the fate of small lenders is an emerging theme. SCI's inaugural Marketplace, Direct Lending & Securitisation Seminar in London last month featured a diverse set of views on how consolidation will foster securitisation through a concentration of more sophisticated platforms.

Panellists at the seminar pointed to an increasing expectation that the pressures of a growing and more demanding market will prompt players to thin out. However, opinions were divided on the way this will come about.

"I'm not sure that the market can sustain 70 to 80 platforms," said Kevin Allen, head of insight at RateSetter. "The volume demand has increased to the point where it is not sustainable for many of the smaller businesses. Very niche platforms may able to survive; otherwise, I'd expect a lot of companies to be run out of the market."

Another path would involve larger lenders stepping in to buy out their smaller counterparts. One such example was RateSetter's purchase of GraduRates' loan book back in 2014. The acquisition was agreed after GraduRates decided that it would run down its operations ahead of impending regulations.

"For marketplace lenders, lending capacity is critical. If you have been running your platform for two to three years and only have capacity for £20m or £30m of lending, it's just not enough," added Andrew Whelan, ceo and director of lending at GLI Finance. "In the end, consolidation comes to every market as the winners continue to get bigger. It's already happening in this market."

However, the diversity of assets and services on offer in marketplace lending could be used by many smaller firms as leverage to survive longer. This would allow a number of them to grow at a stable pace without succumbing to ambitious growth goals.

"It's what many of the larger players forget," observed Partel Tomberg, ceo and co-founder of Bondora. "Yes, there are a lot of lenders, but most have nothing in common other than their self-description as marketplace lenders."

The case with many small platforms will also be whether the consolidation of their infrastructure and operations will be beneficial to larger firms. Ravi Anand, md at ESF Capital, stated that many small platforms are too unsustainable, sparking concern as to whether larger firms will be getting value for what they purchase.

"Most of these smaller platforms don't have a scalable origination edge as it is," Anand explained. "Because of this, there is likely going to be more companies falling out of the market rather than being gobbled up by the larger players."

Such factors can help explain why securitisation is still yet to kick off in the UK market, with small lenders lacking the capital or sophisticated operations to venture into such territory. Comparisons with the US can shed light on how far the lenders in the market must go before they can replicate similar success.

"The key difference is that the idea of P2P in the US has transformed into a more capital market-based mentality," says Holger Kapitza, director and structured credit analyst at UniCredit.

Specifically, he notes the role institutional investors are playing, which has enabled the US market to transitions from a P2P market to a popularly phrased I2P market - referring to the investor-to-peer relationship. Many panel members agreed that this will be a key factor to boosting the UK and Europe's securitisation capabilities in the sector.

"This starts with creating a trusted brand that both customers and institutional investors will be willing to commit towards," adds Anan.

Until such time, one to two securitisations will be the likely volume this year in the UK. Panellists speculated on how the inaugural deals will be rated, if/when they hit the market. Based on recent developments in the US, a single-A rating is considered a viable goal for the senior tranches.

"It's possible that we will see the same rating assigned in Europe," says John Woodhall, senior counsel at Sidley Austin. "The rating agencies have stressed that it is not a new asset class that we are dealing with; the underlying loans are, after all, coming from familiar sectors - such as SME lending and consumer lending - which have substantial rating coverage. The origination methodology is, of course, more novel."

It is anticipated that rating agencies will use their existing methodologies for consumer and SME marketplace ABS deals, due to the similar structural features of marketplace lending assets. However, they will likely adjust their assumptions to account for risks, such as the short operating histories of platforms.

With this in mind, Kapitza noted that a single-A rating is not a certainty - recent US deals were rated up to A3 by Moody's. "Recent trends say that this could be what the first deals are assigned, but the agencies were initially looking at a triple-B rating," he said. "However, I think investors will be the key factor in the end. They will make their determinations from assessing the risks, knowing that historically investors are familiar with the risk of consumer and SME assets."

He concluded: "They will also consider borrower performance history, the structure of the deal, representations and warranties, the underwriting process and so on."

JA

Structured Finance

Investment banking head hired

ClearlySo has recruited Matthew Vickerstaff as head of investment banking. In this role, he will assume overall responsibility for the firm's investment banking and capital raising activities, including equity and debt placement. Vickerstaff joins from Societe Generale, where he was responsible for managing the global structured finance teams. He has also worked at Hambros Bank.

Structured Finance

Apollo merger questioned

Apollo Commercial Real Estate Finance (ARI) is set to buy Apollo Residential Mortgage (AMTG) for a combination of cash and stock which values AMTG at US$14.59 per share, representing a premium of around 44%. The transaction values AMTG at approximately US$641m.

The transaction has been approved by both boards of directors, but law firm Harwood Feffer is investigating potential claims against the AMTG board. The firm's investigation seeks to ascertain whether the AMTG board is fulfilling its fiduciary duties, maximising the value of the company, disclosing all material benefits and costs, and obtaining full and fair consideration for stockholders.

Structured Finance

Structured credit analyst promoted

Moody's has named Al Remeza associate md and head of its US structured credit new ratings team within the structured finance group. Remeza has been with the structured credit team since joining the rating agency in 2004, where his most recent responsibilities have included co-managing the structured credit team and serving as managing editor for Moody's CLO Interest newsletter.

Structured Finance

Fourth Gleacher payout confirmed

Gleacher & Company's board has decided to make a fourth liquidating distribution to the firm's stockholders in the amount of US$1.82 per share of its common stock - approximately US$11.3m in aggregate. The previous distribution was announced last September (SCI 29 September 2015).

The record date for the latest distribution is 15 March, while the anticipated payment date is one week later. Total liquidating distributions, including this fourth distribution, amount to US$10.37 per share - approximately US$64.1m in aggregate.

Risk Management

Valuations businesses sold off

Intercontinental Exchange is set to acquire S&P Securities Evaluations (SPSE) and Credit Market Analysis (CMA) from McGraw Hill Financial. When completed, the acquisition will enable ICE to offer customers fixed income and credit data and valuation services.

Under the terms of the agreement, ICE can elect to satisfy its payment of the purchase price in either cash or shares of its common stock. The transaction is subject to regulatory approvals.

"After a strategic review of our portfolio, we determined that we do not have critical mass in the area of securities pricing. Therefore, this choice is the right decision for MHFI and S&P Global Market Intelligence," comments Mike Chinn, president of S&P Global Market Intelligence.

He adds: "ICE is positioned to expand coverage in derivatives and offer a multi-asset class, comprehensive source for pricing and reference data, so clients of SPSE and CMA will benefit as well. Once the transaction closes, we will work together with ICE to ensure a seamless transition."

Separately, Hester Serafini has been appointed coo of ICE Clear US, reporting to ICE Clear US president Tom Hammond. She is responsible for managing the clearing house operations and interpreting and implementing regulatory changes.

Serafini joins from JPMorgan, where she led the OTC clearing and intermediation business for credit, FX and rates derivatives in EMEA. Before that, she was global head of credit prime brokerage and clearing at Deutsche Bank.

Risk Management

Torstone continues expansion

Post-trade securities and derivatives processing provider Torstone Technology has further expanded its team and also launched a standalone reporting module in Japan. The firm began a targeted expansion push last year (SCI 9 December 2015).

The new arrival is Gordon Russell, who becomes head of sales and business development for Asia, based in Singapore. He has over 20 years of experience in financial services technology and was most recently global head of risk at Broadridge.

The new Japan reporting module will be available through Torstone's Inferno system, providing full operational support to investment banks trading a wide range of asset classes, including derivatives, who must comply with various reporting requirements mandated by Japanese regulators.

RMBS

UBS settlement welcomed

The president and ceo of the National Association of Federal Credit Unions (NAFCU), Dan Berger, has described UBS' agreement last week to pay US$33m in compensation over faulty pre-crisis RMBS as "welcome news". The settlement is meant to provide recovery on toxic assets, which the NCUA says caused losses to corporate credit unions that invested in the products based on untrue statements. The NCUA also accepted prejudgment interest on the amount, which will be determined later by the US District Court for the Southern District of New York.

In the case, UBS reportedly sold RMBS to Southwest Corporate Federal Credit Union and Members United Corporate Federal Credit Union for nearly US$432.4m between 2006 and 2007. The NCUA's argument claimed that the offering documents possessed misinformation over the loans that were originated in accordance with underwriting guidelines.

"NAFCU and our members welcome NCUA's tenacity in seeking recoveries concerning the sale of faulty securities that led to the breakdown of five corporate credit unions," says Berger. "NAFCU continues to encourage the agency to maintain its vigilant legal recovery efforts."

However, US District Judge Katherine Forrest last week dismissed nearly all of the NCUA's trustee lawsuits against Bank of America and US Bancorp. NCUA sued over US$6.8bn in toxic mortgage securities sold to corporate credit unions and is now currently reviewing the court's decision.

The NCUA has been active this year in cases seeking the recovery on losses made from faulty pre-crisis RMBS. As recently as January, it was also one of a number of entities involved in the settling of a US$5.06bn dispute with Goldman Sachs (SCI 15 January).

RMBS

Ocwen faces further investigation

Ocwen has disclosed that it is the subject of a fresh investigation by the US SEC. The news comes after the servicer recently settled a US$2m penalty with the regulator for misstating financial results, following its use of a flawed methodology to value complex mortgage assets (SCI 21 January).

In its annual report, Ocwen revealed that it received a letter from the SEC on 11 February informing it that the SEC has opened an investigation relating to fees and expenses charged in connection with liquidated loans and REO properties held in Ocwen-serviced non-agency RMBS trusts. The letter requested that the servicer voluntarily produce documents and information.

Ocwen says it is cooperating with the SEC on this matter.

RMBS

MBS trading team formed

Mitsubishi UFJ Financial Group is building a US MBS trading team and hired Dave Cannon in 4Q15 to lead the effort. Cannon arrived from RBS, where he was co-head of ABS and MBS trading. The new trading team will focus on agency MBS and began trading in US mortgage securities this month.

ABS

Chinese revolvers 'add risks'

Revolving structures are expected to become more widely used for short-tenor collateral in the Chinese Credit Asset Securitisation market, having emerged in 2H15 in a number of consumer ABS transactions. However, Fitch warns that the use of revolving periods introduces a number of risks for investors that are not present in static transactions. For a revolving transaction to achieve a rating comparable to a static one with similar collateral, the agency says these additional risks need to either be mitigated by structural features or addressed in the rating analysis.

Fitch is aware of four transactions that feature revolving periods issued in the past six months under the Credit Asset Securitisation Scheme: two consumer credit ABS sponsored by Bank of Ningbo; and two auto loan ABS sponsored by China Merchants Bank and SAIC-GMAC Automotive Finance Co. The deals have the substitution of repaid cash for new receivables in common, but have different parameters around the substitution and the protection afforded to investors.

Among the additional risks that investors in a revolving transaction face is that the transaction could have greater exposure to economic cycles and a longer transaction life implies that it is more likely to have bonds outstanding during a downturn. Revolving transactions are also exposed to the risk of deteriorating portfolio credit quality, due to declining origination standards or changes in the types of assets included in the pool. Additionally, there may be incremental losses from new loans that are added, which may need additional credit enhancement to cover.

The rating process for revolving deals may include a higher loss assumption based on the maturity of the underlying assets and the length of the revolving period to address the greater exposure to economic cycles. To address the potential for deterioration in collateral quality and incremental loss, revolving transactions usually feature certain portfolio covenants and performance-based stop-revolving triggers.

Portfolio covenants include individual loan and portfolio level eligibility criteria. Fitch says it will normally assume the portfolio will migrate to the worst practically possible combination based on the set parameters.

To avoid adverse selection, Chinese revolving transactions also require originators to offer 20%-100% more eligible assets than available cash for trusts to select. In the example of the Hexin auto loan ABS, China Merchants Bank is required to offer eligible collateral at 200% available cash balance for the trust to pick on each purchase date. In the example of the YongDong consumer credit transactions sponsored by Bank of Ningbo, the revolving feature will be terminated when cumulative defaults reach 5%.

Also in the example of the Hexin auto loan ABS, the one-year revolving period will stop if cash as a percentage of outstanding principal balance reaches 10%.

Fitch suggests that revolving structures require additional disclosure in regular reporting. Updated pool information, including updated pool cuts, is needed on a regular basis during revolving periods to allow market participants to assess how the pool is evolving over time and whether portfolio migration is positive or not. Additionally, the agency will request updates to information regarding origination procedures and controls, as well as product profiles and limits.

ABS

PREPA extensions granted

PREPA has granted a number of extended deadlines surrounding its debt restructuring deal, including a three-week extension for Puerto Rico officials to submit a proposed rate fee. The fee would help repay the bonds that are being used in the securitisation deal.

The 22 March deadline has been pushed back from the original 1 March deadline that was given for officials to agree on a charge. This is accompanied by a new 22 April target set for a broader tariff review on the rate.

"These extensions were required by the amendments made to the PREPA Revitalization Act during the legislative process that required additional information and documentation that must be submitted to the Energy Commission as part of the tariff review process," says PREPA.

Following a submission of the proposed fee, the Energy Commission will then reportedly provide feedback within a 75-day time frame. The move continues a drawn-out process that has seen numerous deadline extensions for the restructuring bill and most recently a bondholder dispute over the structuring of the deal's payments (SCI 26 February).

Meanwhile, MBIA says that it foresees an agreement with PREPA in the coming months. The key bondholder has reportedly been one of the main parties that has failed to agree to terms with the restructuring deal (SCI 26 November 2015).

However, MBIA's National Public Finance Guarantee Corporation ceo Bill Fallon says that an agreement is in place, subject to thrashing out certain conditions. He notes that he is optimistic of a deal taking place "later this year".

Structured Finance

Calm advised over Madden

Brian Korn of Manatt Phelps & Phillips has suggested that the marketplace lending industry has "nothing to fear but fear itself" in relation to the Madden vs Midland case. In a recent industry comment, he says that while there is concern that the outcome of the case will have a significant and negative impact on marketplace lending platforms and therefore those invested in the sector, there is no need for panic.

In the comment, Korn highlights a statement issued by Madden's lawyers to the Supreme Court that marketplace lenders should not be affected by the outcome of the litigation. They state that "marketplace lending...is a new and narrow segment of the lending industry that has nothing to do with this case. Wholly distinct from traditional financial institutions, marketplace lenders operate virtually unregulated internet platforms that enable private investors to lend to private borrowers, often at usurious rates."

Additionally, Korn suggests that most judges would be swayed by the argument that marketplace lenders shouldn't be implicated by the Madden ruling. Additionally, the case turns on an interpretation of the National Banking Act, whereas no marketplace platform is partnered with a national bank.

The National Banking Act and rulings made on it shouldn't therefore implicate marketplace lending platforms. As a result, a legal challenge to a platform based on the Madden ruling would have to refer back to state lending laws and the Federal Deposit Insurance Act.

Furthermore, the comment notes that platforms can avoid the implications of the Madden case by distancing themselves from the facts of the case. One way of doing this is by ensuring their partner banks are more closely involved in the lending process, such as skin-in-the-game investments and appointment as master servicer.

Finally, Korn says that the Supreme Court may not take the case and that following the recent death of Justice Scalia and the effect on the balance of 'conservative' judges in the court, the ruling might be difficult to overturn. Given this outcome, it's likely the Second Circuit's decision will control.

Structured Finance

Negative rate impact weighed

Dramatically low negative interest rates in Europe are credit negative for issuers whose structured finance deals do not accommodate to these rates, according to Moody's. However, the agency expects this trend to revert by 2017.

"Available buffers are sharply diminishing on swaps which do not accommodate for negative rates," says Sebastian Schranz, a Moody's avp and analyst. "Negative rates erode excess spread and introduce negative carry in the transactions."

The agency explains that the erosion of excess spread leads to a drag on both the available cash of the issuer to pay noteholders and the timeliness of those payments. In transactions in which excess spread levels are already low, negative rates lead to the build-up of losses to the transaction.

"In response, most issuers have introduced floors on the floating leg of fixed-floating swaps since mid-2015, to mitigate the credit risk stemming from swaps in these transactions," says Moody's avp Greg Davis. "But, even then, negative interest rates also weigh on money held in cash within the securitisation transactions."

Although a few deals have interest on the cash held floored at zero, Moody's explains that the majority of transactions do not have an effective floor on interest. Extremely low Euribor rates are expected to fall even further in 2016, with the one-month Euribor rate nearly at minus 28bp. However, the agency does not expect negative rates to persist in 2018.

"We expect the ECB refinancing rate to remain flat at around zero percent over the next two years to encourage growth and counterbalance deflationary developments," adds Schranz.

Moody's also expects three-month Libor to start an upward trend by the end of 2016. This should increase in tandem with an increase in the Bank of England's discount rate.

Structured Finance

Marketplace origination addressed

Lending Club has introduced changes to its loan origination model to address the legal concerns created by the Madden vs. Midland Funding decision in the Second Circuit US Court of Appeals. Moody's notes that these adjustments reduce, but do not eliminate, the risks of a marketplace lender's loans being subject to state usury laws.

As part of Lending Club's changes, the partner bank (WebBank) that funds loans arranged by Lending Club will maintain an ongoing economic interest in all loans after they are sold. In addition, the partner bank will retain an ongoing contractual relationship with borrowers.

The majority of the revenue that WebBank receives will be tied to the terms and performance of the loans. According to its corporate filings, Lending Club in the past has paid WebBank a monthly programme fee based on the amount of loans that the bank issued and Lending Club or its partners purchased, subject to a minimum monthly fee.

Moody's believes that Lending Club's adjustments strengthen its protections against being deemed the true lender or against its loans losing exemptions from state usury laws because of other legal challenges. The agency expects the changes to the partner-bank origination model to be positive for ABS backed by future Lending Club loans.

However, legal uncertainties remain because courts have not provided definitive guidance on all of the issues involved. Courts in the future also could consider other factors in their decisions based on the unique facts of a particular case. Hence, marketplace lenders using the partner-bank model will likely find it challenging to completely eliminate the legal risk, according to Moody's.

"If state usury laws were to apply to Lending Club's loans with high interest rates, courts could deem some of the loans void or unenforceable, or reduce the interest rates on them, which would be credit negative for ABS backed by the loans," it suggests.

Cross River Bank, the other leading partner bank in the marketplace lending sector, retains up to 10% of monthly originations of platforms, including Marlette Funding.

Structured Finance

SFR rent trends examined

Property managers in single-family rental securitisations appear to have been steadily driving rents higher, according to a recent Morningstar Credit Ratings analysis. The study shows that these increases have come from renewals more often than new tenants for vacant properties.

"It is in the interest of single-family rental securitisations for property managers to keep properties occupied by maintaining high renewal rates. Our analysis shows that property managers should have a further preference for renewing tenants, as they are able to more consistently realise higher rental increases from renewals than from properties that become vacant," Morningstar notes.

Contractual annual rent changes for both renewal properties and vacant-to-occupied properties show increases, but renewals tend to bring about slightly higher and more consistent rental increases of around 3%-4%, based on Morningstar data. There also appears to be some seasonality to the rental increases, with larger renewal rental increases occurring in the autumn and bigger vacant-to-occupied increases happening in the summer. These findings are consistent with anecdotal evidence that suggests tenants generally prefer to move in the summer.

Property managers also stress the importance that tenants place on their preferred school districts. The findings support this claim as well, in that new tenants are willing to absorb higher rental rates in the summer in order to be moved in time for the new school year, while renewed tenants will pay higher rental rates in the autumn to ensure they stay in a chosen school district.

A further examination of rental changes in vacant-to-occupied properties shows that the length of vacancy plays a large role in the ability of property managers to increase rental rates. The longer a property remains vacant, the more likely a property manager is to shift the focus from optimising the rent to simply getting the property occupied. The critical cut-off between rental increases and decreases is around three to four months of vacancy.

The analysis focused on contractual rental changes over the 18 months ending in December 2015, based on data from 23 single-borrower transactions and over 91,000 individual properties.

Structured Finance

Mid-market fund closes

EFA Group has made its first close of an asset-based direct lending vehicle that provides structured senior secured loans to mid-market companies operating within the real economy. EFA Real Economy Trust (EFA RET) targets net total returns to investors in excess of 10% per annum, which will be distributed semi-annually.

The firm's general mandate involves the provision of short-term revolving trade finance loans to mid-market businesses. This has enabled it to build a substantial relationship structure and place internal and external deals in the process. The EFA RET now allows it to consolidate the deals into an investable vehicle, extending the short-term financing to mid-term lending.

"As banks continue to shrink their balance sheets, we see an increasing withdrawal of credit availability. Companies in the mid-market segment are most impacted, with fewer new deals being financed," says Xavier de Nazelle, portfolio manager of EFA RET. "All of these companies are banked, but an increasing number of their mid-term financing needs tend to fall below banks' radars. We enjoy a close relationship with the banks and work together to best service our borrowers."

The fund is now 100% committed, with a ready pipeline of deals that EFA will underwrite over the first half of 2016. It plans to start deploying capital this month and will begin a second round of fundraising once fully deployed. The firm adds that demand is high, with strong investor interest indication by steady inflows of capital in the last few months.

Structured Finance

Associations confirm STS support

AFME, the European Fund and Asset Management Association (EFAMA), the International Capital Market Association (ICMA) and Insurance Europe have issued a joint paper backing EU efforts to develop a robust and successful STS framework. The associations believe that STS and the associated CMU could play a pivotal role in enabling non-bank funding alternatives across the region.

The joint paper affirms the importance of securitisation in a well-functioning financial market and calls for securitisation to be treated on a level playing field with other forms of investment. "For the European securitisation market to be safely and successfully rebuilt, the new framework must be attractive for both issuers and investors, while operating under a strong but fair and rational regulatory regime," comments Simon Lewis, AFME ceo.

CDS

Succession question resolved

ISDA's EMEA Determinations Committee has determined that, for the purposes of the 2003 Credit Derivatives Definitions, no succession event occurred with respect to Novo Banco on or about 29 December 2015. It also ruled that, for the purposes of the 2014 Credit Derivatives Definitions, there is no successor to the relevant obligations of Novo Banco. This is the second CDS credit event question to be resolved following the Bank of Portugal's retransfer of five bonds from Novo Banco to Banco Espirito Santo (SCI passim).

CLOs

QCLO bill passed to the House

The Barr-Scott bill - which seeks risk-retention relief for qualified CLOs (QCLOs) - has passed the House Financial Services Committee by a vote of 42-15, with 10 democrats joining the bill, according to S&P. The bill now passes to the full House of Representatives for a vote. Assuming passage by the House, it would then have to be introduced and passed by the Senate and signed by the president before becoming law.

A QCLO is subject to tests in six categories: asset quality, portfolio diversification, capital structure, alignment of interests, manager regulation and enhanced transparency/disclosure. If a transaction passes all of these tests, the manager can retain 5% of the CLO equity, rather than 5% of the fair value of all the notes.

"Importantly, by meeting these six best practices, requiring substantial subordinated CLO fees and requiring the manager to retain 5% of the CLO equity, the proposal meets both the letter and the spirit of the Dodd-Frank Act," the LSTA observes.

CLOs

Survey suggests manager preparedness

Maples Fiduciary last month conducted a survey of its CLO manager clients with a view to providing insight into risk-retention strategies. The results indicate an overall state of preparedness among CLO managers, which the firm says augers well for industry compliance ahead of the year-end deadline.

Among the key survey findings is that 73% of managers polled have risk-retention structures in place or will have imminently. Over half (55%) of managers prefer the capitalised majority-owned affiliate risk-retention structure; a quarter prefer the capitalised manager vehicle structure, while 8% chose the originator structure. In terms of the 5% retention piece, 49% of managers indicated that they would take a horizontal slice and 30% favoured the vertical slice.

Over two-thirds (68%) expected financing for risk-retention structures to be sourced from a combination of internal and external sources, while 26% expected financing to be 100% sourced internally from affiliated entities. In terms of categorising their risk-retention financing provider, 55% of those surveyed indicated it would be an existing CLO market investor, while 13% suggested it would be a first-time CLO investor. Just over a third (36%) categorised the financing provider's industry type as insurer, while 17% categorised it as arranger/investment bank.

Over three-quarters (77%) of managers have or are considering risk-retention structures that are EU and US compliant. However, the Cayman Islands and Delaware remain the dominant domiciles for US CLO risk-retention structures, with 75% of those polled using one or both jurisdictions.

Of survey participants, 70% categorised risk retention as a challenge, but said they are either facing bigger issues or that risk retention is not business critical. Almost all (95%) of them predict that more manager sales, mergers and consolidation will occur due to the new rules.

The survey polled over 60% of US CLO managers active in 2015.

CLOs

Sky Road, Virtus link products

Sky Road has added an enhanced trade processing feature for CLO and loan portfolio management to its Motion platform. The new functionality allows clients to achieve straight-through connectivity with Virtus Partners' CDO Suite, Virtus' portfolio administration software for multi-asset class tracking and compliance monitoring.

Sky Road clients can enter underlying loan portfolios in Motion and have the loans automatically sent to Virtus on trade date. Virtus will perform compliance review and report the results back to the investment manager.

CLOs

Pure APAC CLO prepped

SC Lowy and UOB Asset Management are together launching the first fully Asia Pacific-backed, actively managed cashflow CLO. The CLO will be comprised predominantly by senior secured bank loans from Asia Pacific issuers.

The transaction's collateral will be co-managed by UOB Asset Management and SC Lowy and underwritten by Standard Chartered, Resource Capital Market and UOB Securities. The transaction is being marketed in the US this week and Europe and Asia next week.

CMBS

Five-year CMBS 2.0 loans eyed

Fitch says it is closely monitoring five-year US CMBS loans originated in 2011 that are slated to mature this year. The agency suggests that underperforming assets will have a difficult time refinancing in the face of interest rate and bond spread uncertainty, as well as new regulatory requirements that continue to pressure liquidity.

Approximately 11% of Fitch's universe of loans in CMBS conduits from the 2011 vintage will mature in 2016. Of these five-year loans, over 12% have already been defeased, while only two loans (comprising 2.6%) are currently in special servicing.
For the remainder, performance continues to remain strong, with over 66% of them (by balance) having a debt service coverage ratio (DSCR) on a net cashflow (NCF) basis greater than 1.45x - which should provide strong prospects for refinancing.

The two loans in special servicing are both secured by office properties. The borrower for one of them - which is secured by an office property in Washington, DC - is requesting a six-month extension of its April 2016 maturity. Occupancy remains above 90%, but there is significant near-term lease rollover risk, primarily due to the largest GSA tenant occupying nearly 30% of the space with a lease expiring this year.

The other loan, secured by an office property located in North Richland Hills, Texas, became real-estate owned in July 2013. The loan transferred to special servicing in April 2013 for imminent default when the largest tenant defaulted on its lease and subsequently vacated the property. The loan had an original maturity of March 2016.

Of the loans identified by Fitch, eight (4.5%) have DSCRs below 1.25x. One is secured by a hotel property, two by office properties, three by retail properties and two by manufactured housing community properties.

The agency notes that there is no exposure to the energy markets in North and South Dakota among the five-year loans maturing this year. Additionally, exposure to the Houston oil market is relatively limited, consisting of five loans totalling US$179.6m (representing 7.5% of the total balance of five-year maturing loans this year).

The largest of these assets is the US$155.3m Three Allen Center office loan that matures in May 2016. Performance has been strong, with year-end 2014 NCF DSCR at 1.84x.

The other four loans are small in balance, ranging between US$3m and US$8m.

CMBS

GGLF expected to stabilise

Moody's says that the German Ground Lease Finance (GGLF) CMBS continues to perform in line with its expectations after the agency met with the managing agent Immofori in February. Refinancing remains a risk to the transaction, however, and will be contingent on the amount of excess cash left available to amortise the structure prior to its final maturity.

The transaction has caused a number of concerns, including rising costs that have led to only marginal deleveraging over the last year. These costs have risen as a result of the insolvency of the deal's previous managing agent, Vivacon, and its susbsequent transition period of servicing activities to Immofori.

Immofori was appointed managing agent in July 2014, six months after Vivacon went through insolvency proceedings and over a month after it announced it would discontinue its business operations. Immofori subsequently met Moody's in November 2014 to provide information on its business profile, operations and responsibilities.

Following on from this, Moody's meeting this year with Immorfori provided progress updates on servicing of the ground rents and data gathering, as well as the transaction performance and the development of transaction costs. The managing agent has been proactively working towards a number of solutions to the difficulty of on-boarding the transaction's portfolio. This has included a data digitisation project to capture land register details.    

Although costs have increased over the last two years, Moody's now expects them to stabilise at 11% in 2017 after recent conversations with both Immofori and the transaction's trustee.

CMBS

Loss, liquidation totals decline

US CMBS loss and liquidation totals declined substantially last month, falling in line with levels last seen 12 months ago, according to Trepp. A total of US$567m across 43 loans was disposed of in February, down from US$887.7m in December and US$2.4bn in January. Average loan size also plunged to US$13.2m this month from US$19.4m in January.

Four relatively small loans totalling US$33.4m experienced over 100% losses, three of which held a remaining balance of under US$7m. The largest loan resolved in February was the US$190.8m Gulf Coast Town Center Phases I & II, securitised in CSMC 2007-C5, which was closed out with a 23.23% loss severity (see SCI's CMBS loan events database). The US$51.9m Sheraton at Newark International Airport, securitised in JPMCC 2006-CB17, suffered a 43.57% loss.

Other noteworthy loans disposed of last month were the US$21.8m Phillipsburg Commerce Center (BSCMS 2006-PWR13) and the US$21.7m Fourth & Walnut (MLMT 2006-C1), which took 100% and 88.09% in losses respectively.

Dropping by almost 28 percentage points, loss severity hit a record low last month. February loss severity dipped to 33.71%, compared to 61.61% in January and 60.9% in December. Focusing only on losses greater than 2%, volume was US$481.2m, with a 39.56% loss severity.

CMBS

Delinquency decline continues

The Trepp US CMBS delinquency rate stood at 4.15% at end-February, a drop of 20bp from January. The rate is now 143bp lower than the year-ago level.

CMBS loans that were previously delinquent but paid off with a loss or at par totalled over US$930m last month. Removing these previously distressed assets from the numerator of the delinquency calculation helped push the rate down by 18bp.

A little over US$1.05bn in loans were cured in February, which helped push delinquencies lower by another 21bp. About US$1bn in loans became newly delinquent, which put 20bp of upward pressure on the delinquency rate.

The percentage of seriously delinquent loans is now 4.06%, 10bp lower for the month. Excluding defeased loans, the overall 30-day delinquency rate would be 4.39%. Trepp reports that there is currently US$21bn in delinquent loans.

Insurance-linked securities

Malta gets first RSPV

USA Risk launched the first reinsurance SPV in Malta last week as the jurisdiction seeks its debut ILS deal. Exchange Re will allow ILS managers and investors to undertake private collateralised reinsurance transactions within the jurisdiction and uses a cell-based approach.

Malta adopted legislation on securitisation cell companies back in 2014 for the purpose of governing future ILS (SCI 8 December 2014) as it pushes to establish itself as a market for the asset class. Exchange Re will apply its structure for deals to separate the assets and liabilities between the different cells in the vehicle.

"We have gauged the Maltese market and found interest in this area," says John Tortell, vp, USA Risk. "Being a full member of the EU gives us an advantage in being able to offer a complete product and service."

Tortell adds that Malta provides a number of solid foundations to work upon, including an 'approachable' single regulator - the Malta Financial Services Authority. The vehicle is compliant with EU Solvency 2 regulation and aims to offer lower costs for collateralised reinsurance deals. The firm is now awaiting feedback from various sources before giving the go-ahead to start placing deals.

Insurance-linked securities

Early redemption for TMNF ILS

An early redemption notice has been posted for the Kizuna Re II series 2015-1 catastrophe bond, indicating that the notes will be redeemed on 1 April. S&P expects the issuer to pay the unpaid principal and all interest due on this date, with no prepayment penalty.

The transaction provides for six early redemption events. The cedent, Tokio Marine & Nichido Fire Insurance Co, sent a notice to the issuer electing to exercise an early redemption event VI. This event permits the cedent to terminate the reinsurance agreement and redeem the deal early if it believes the supplemental premium payments or a fee imposed on any cash credit balance in the Japanese Yen deposit account or collateral account is likely to exceed US$750,000 in a risk period or US$2m during the term of the transaction.

JPMorgan Asset Management announced on 24 February that it will liquidate the JPMorgan JPY Cash Liquidity Fund on 11 March, with proceeds disbursed to fund investors on 14 March. During the time between the disbursement and the early redemption, the funds in the issuer's collateral account will be held in cash.

NPLs

AnaCap increases Italian NPL holdings

AnaCap Financial Partners has purchased two Italian NPL portfolios with a face value of more than €2bn. The portfolios were acquired by AnaCap Credit Opportunities III from SPVs whose securities were majority owned by GE Capital Real Estate and RBS.

The portfolios each have a gross book value of around €1bn and include secured and unsecured SME loans, with the secured positions held against residential and commercial property. AnaCap previously purchased Italian NPL portfolios from UniCredit in 2014 (SCI 16 October 2014) and 2015 (SCI 29 September 2015).

Risk Management

Aussie classification letter published

ISDA has published a classification letter enabling counterparties to notify each other of their status for clearing requirements under Australia's mandatory central clearing regime for OTC derivatives. Counterparties can bilaterally communicate their status by answering a series of questions.

Appendices to the letter include a short-form and a long-form version of the Australian Securities and Investments Commission (ASIC) clearing classifications and the ASIC clearing classification update notice. ISDA prepared the appendices to help counterparties provide classification-status information to determine the application of certain requirements under ASIC's derivative transaction rules.

Risk Management

SA-CCR tool launched

Misys has brought a new tool to the market that seeks to help banks comply with the Basel Committee's standardised approach for counterparty credit risk (SA-CCR). Misys FusionRisk SA-CCR allows banks to apply the same risk methodology for derivative counterparty exposures across both capital reporting and internal risk limits management.

The tool will hold all the supervisory data required by the regulation, mapping trade information and capturing all asset classes, right netting sets, collateral and margin agreements. This is in response to the new regulatory requirements that will see more data inputs, calculation changes and granularity across business lines. The SA-CCR will replace the current exposure method and standardised method respectively, officially changing on 1 January 2017.

Misys' product comprises a variety of options, including a dashboard for drilling down to different levels of exposure and limits. Its exposure at default computations are also available for all further accounting and regulatory computations, such as risk weighted assets, IFRS 13 and credit value adjustments.

Risk Management

Analytics enhancements offered

Moody's Analytics has added transaction-specific performance data to its CreditView service, allowing customers to compare performance of securitisations globally across a variety of metrics. The firm has also added a new liability management tool to its ABS System, which is designed to enable users to quickly model and reverse-engineer transactions without using complex scripting languages.

With the enhancement to Moody's CreditView, customers can now: customise data using interactive tools to assess the credit performance of a single deal; screen for peer transactions; assess trends with interactive charting; and forecast the performance of newly issued transactions by evaluating seasoned deals. Meanwhile, models created using the liability tool are easy to review with its intuitive onscreen visualisation capabilities.

Risk Management

EU adopts CDS clearing rule

The European Commission has adopted a set of rules which require certain OTC credit derivative contracts to be cleared through central counterparties (CCPs). This implements the clearing obligation under EMIR.

The EC's decision takes the form of a delegated regulation and refers in particular to euro-denominated CDS covering some European corporates. The clearing obligation will come into force following scrutiny by the European Parliament and Council of the EU. It will be phased in over three years.

Risk Management

Optimisation tool launched

Numerix has launched what it describes as a unified XVA pricing, counterparty credit risk management and market risk platform. Dubbed Numerix Oneview, the service allows users to drill down and slice/dice multi-dimensional datasets to provide complex risk and optimisation calculations.

The firm says that with the finalisation of the fundamental review of the trading book (FRTB), consolidation of XVA pricing adjustments into pre-trade pricing and bilateral margin requirements becoming clearer, financial institutions are undergoing a transformative shift in risk technology infrastructure planning in order to meet implementation deadlines. However, legacy systems are siloed, often entrenched in duplicate processes and can be expensive to maintain. The Oneview platform therefore aims to provide a unified view of risk across an institution, so that firms can make informed risk, profitability, collateral and capital allocation decisions.

RMBS

Freddie enhances disclosures

Freddie Mac has expanded its disclosures for its single-family credit transfer initiatives to help provide investors with additional information to analyse. The GSE has also released details of its second STACR offering of the year, STACR 2016-HQA1.

The enhanced disclosures include quarterly updates on credit scores for outstanding loans in all transactions and mark-to-market LTVs that leverage the estimated property value from Freddie's Home Value Explorer Automated Valuation Model tool. There are also additional details for loan modifications and loan-level mortgage insurance, the latter identifying lender-paid versus borrower-paid mortgage insurance.

Freddie's US$475m STACR offering comprises loans with LTVs ranging from 80% to 95%. The GSE holds the senior loss risk in the capital structure and a portion of the risk in the class M1, M2 and M3 tranches, as well as the first loss B tranche.

The deal has a reference pool of single-family mortgages with an unpaid principal balance of more than US$17.5bn. The reference pool consists of a subset of 30-year fixed rate single-family mortgages acquired by Freddie between April and June of 2015.

Barclays and Wells Fargo will serve as co-lead managers and joint bookrunners, with Cantor Fitzgerald, Deutsche Bank, JPMorgan and Nomura as co-managers. Ramirez and Co is the selling group member.

RMBS

Deal agent principles issued

The Association of Institutional Investors has released a set of principles promoting a 'deal agent framework', which it believes would significantly enhance the governance protocols built into current US RMBS structures. The proposal seeks to reform private label RMBS contracts by providing fair investor protections, increased transparency and a flexible framework for adapting to unexpected events.

"I believe the deal agent framework will ultimately enhance investor protections within all US RMBS structures by codifying robust and continuous fiduciary duties of care and loyalty," comments John Gidman, president of the Association of Institutional Investors.

The proposal is based on over 18 months of discussions facilitated by the US Treasury under its private label securitisation initiative. A substantial portion of the group's conversations focused on the inclusion in RMBS trusts of an independent party - a deal agent - that would represent the interests of all investors, subject to robust and continuous fiduciary duties of care and loyalty.

The resulting deal agent framework aims to improve RMBS transactions by ensuring that all parties to the securitisation fulfil their contractual obligations and are subject to the oversight of an entity empowered with enforcement authority. Additionally, the deal agent would be authorised to act on behalf of all investors to negotiate amendments to the securitisation contracts.

A deal agent will be charged with protecting the interests of the RMBS trust, maximising the net present value of its assets and making certain strategic decisions in limited circumstances. Consistent with this governance role, the deal agent's duties are a combination of prescribed and open-ended tasks, incorporating fiduciary, reporting, review and oversight obligations.

Investors would be able to communicate with the deal agent, but would not generally have authority to direct it, although it may be guided by a vote of all bondholders in very specific situations. The deal agent would be protected - either through trust indemnification or through an alternative means, if agreed by the parties - from liability, so long as it has acted in accordance with its duties of care and loyalty.

The deal agent framework will be enforced through arbitration whenever possible to reduce legal costs to the trust and the deal agent.

Should the framework be incorporated by issuers and other transaction parties, the association believes that "many influential and impactful investors will be encouraged to re-engage in what would amount to a significantly reformed new issue US RMBS market". However, it recognises that additional work is necessary towards the practical implementation of the proposals, particularly the enhancement of the underlying securitisation contracts to allow the deal agent to perform its duties to the required standard.

RMBS

RMBS upgraded on model error

Fitch has upgraded five tranches of the Eurohome UK series 2007-1 and 2007-2 transactions, following the discovery of an inconsistent calculation in its UK RMBS surveillance model. The inconsistency had resulted in weighted average foreclosure frequencies that were too high.

Specifically, the class B1 and B2 notes from Eurohome UK Mortgages 2007-1 have been upgraded to single-B (from triple-C), while the class A3 and B1/B2 notes from Eurohome UK Mortgages 2007-2 have been upgraded to single-A plus (from single-A) and single-B (from triple-C) respectively. The deals' other tranches are unaffected and have been affirmed.

The correction of the inconsistency has led to a downward revision of the weighted average foreclosure frequencies for the two deals and thus expected losses across all rating scenarios. Fitch has reassessed the transactions and found that the credit enhancement supporting some classes of notes is sufficient to withstand higher rating stresses, considering their sound performance. This view is consequently reflected in the upgrade of the affected notes.

RMBS

Credit policy tightening welcomed

Investors in future Australian RMBS are expected to benefit from the tighter credit policies set out by the country's regulators. Lenders now have to apply interest rate buffers on a borrower's existing debt in serviceability calculations, whereas previously it had been common practice not to stress interest rates on existing debt.

The Australian Prudential Regulatory Authority and Australian Securities and Investment Commission have both recently released recommendations to lenders that target stricter methods of calculating debt-serviceability. A Fitch analysis shows that the maximum loan amount available to borrowers falls significantly under the new standards, which include: an interest-rate buffer on both the borrowers' new and existing debt; more conservative living expense assumptions; and the treatment of interest-only loan structures. The agency suggests that lenders seem to have settled on interest rate buffers of 2.2%-2.3% per annum in response to these recommendations.

APRA and ASIC have also recommended the use of income-adjusted benchmarks for borrower living expenses in debt-serviceability calculations, as opposed to expenditure benchmarks that do not vary with borrower income.

Fitch's analysis illustrates the impact these two changes have on borrowing capacity, particularly to borrowers with existing debt. The report finds that a couple with no dependents earning a combined gross income of A$130,000 and holding an existing mortgage of A$400,000 could have their new borrowing capacity diminish by 48.5%, from A$447,888 to A$230,747.

The agency believes this is a positive development for future Australian RMBS transactions, as new borrowers will not be as stretched in times of elevated interest rates or economic stress. The changes are expected to have particular effect on borrowers with existing debt, making it more difficult to finance and acquire additional investment properties.

RMBS

Fannie NPL pool purchased

New Jersey Community Capital (NJCC) is the winning bidder for Fannie Mae's second community impact pool of non-performing loans. NJCC purchased the loans through its affiliate, the Community Loan Fund of New Jersey.

The transaction is expected to close on 21 April and includes 53 loans on properties in the Miami area with an unpaid principal balance of approximately US$13.2m. Fannie Mae's community impact pools are structured to attract diverse participation from non-profits, smaller investors and minority-owned businesses.

The cover bid price for the pool was 50.51% of unpaid principal balance. The average loan size of the pool was US$250,209 and the average note rate was 5.83%. The average delinquency of the loans was 69 months.

RMBS

Investment loan performance examined

Morningstar reports that recently it has been presented with a new type of underwriting for loans made to landlords backed by single properties. Typically, these loans are underwritten as consumer loans, with the borrower's income, assets and credit taken into consideration. The new loans, however, are underwritten as business-purpose loans and, as such, rely more on the rental income of the property and less on the borrower's ability to pay.

The rating agency has examined the relationship between the default rate and rental income for various subsets of loans. The general findings show that loans for which the property's rent exceeds the mortgage payment default at a lower rate than similar loans for which the rent is less than the mortgage payment. However, the impact of rent/mortgage payment ratio on defaults is less significant for loans with higher combined loan-to-value ratios or lower FICO scores.

Morningstar analysed more than 920,000 non-agency loans backed by investor properties, matching them to the current median rent estimate from RentRange using bedroom count and ZIP code/metropolitan statistical area/county. For liquidated loans, it used the historical median rents at the point of liquidation.

The agency then calculated the rent/principal, interest, taxes, insurance (PITI) ratio. Many factors may contribute to loan default, but it considers FICO and CLTV to be the strongest predictors of default.

Loans originated in 2006 and 2007 appear to have the highest default rate and lowest rent/PITI ratio. The average rent/PITI ratio for defaulted loans is 1.13, compared with 1.27 for non-defaulted loans. The study demonstrates that investor properties with higher rent/PITI ratios generally perform better.

Morningstar warns that because business-purpose loans are generally not subject to ability-to-repay and qualified mortgage rules, there may be an incentive for borrowers to lie about occupancy intentions. Even if the borrower is truthful, if a property has never been rented, there is a risk that it will not produce the expected rental income or perhaps may not be rentable. These risks can be addressed in a securitisation by having a valid lease in place before the loan is sold to an RMBS trust, the agency says.