Contents

Structured Finance

Final curtain?

FRTB to constrict liquidity, trading

The Basel Committee's finalised fundamental review of the trading book (FRTB) marks another milestone in regulators' long and conflicted relationship with securitisation. While the final draft is less punitive than early versions suggested it might be (SCI 15 January), it is still set to limit market liquidity and trading activity.

"The final version of the FRTB has provided extra clarity to the market, but there is not much difference from earlier versions in terms of the mechanics. It provides an extra burden for banks and we have already seen those banks massively reduce their trading activities," says Werner Gothein, partner, BearingPoint.

He continues: "For credit risk, it looks like trading is becoming unattractive. On the one hand, the ECB is pushing ABS and on the other hand, it is making it very difficult."

The final version of FRTB reduces credit spread widening shocks to measure market risk across securitisation tranches, which will replace banks' existing approach to market risk. Securitisation capital requirements under the final framework will therefore be far lower than anticipated using the July 2015 assumptions, but will still be higher than current capital requirements.

"The final draft of the FRTB is still calling for a median increase in capital requirements of around 20%. That seems excessive, particularly considering the extent to which capital has already been increased since 2008," says Dan Castro, founder and president, Robust Advisors.

He notes that when the TRACE process was introduced for structured finance, the intention was to increase transparency, but the result was reduced liquidity. Because the market can see in black and white where paper has traded, the profits that can be made through trading have been squeezed and the incentive is much reduced.

Between TRACE, Basel 3 and FRTB, trading activity is being constricted from multiple angles, Castro suggests. The impact on liquidity is "inevitable" - and ignores the work banks have done over the last few years.

"The banks self-policed themselves as a result of the crisis. They have pulled back in many areas. That has already had an impact on liquidity, but now in addition banks are getting crushed with capital requirements and having to show everybody where things are trading," says Castro.

While the FRTB framework may be stricter than required, it also marks a move away from the use of internal models. Gothein believes this is a mistake.

"In the mid-1990s the philosophy of regulatory bodies was that people within the banks were best placed to assess those banks' risk. Therefore, they accepted internal models and were trusting in competent people, who knew what they were doing. Now, however, the risk calculation models defined by regulatory bodies tell you exactly what you have to do and you must follow a complex and expensive standardised approach," says Gothein.

He continues: "This new philosophy will make it difficult to run internal models because there is no cost advantage any more. But following only standardised approaches does not improve the effectiveness of risk analysis, leads to potential misallocation and a potential increase in systematic risk."

This also concerns Castro. He says: "You would think that internal models would be the most appropriate option because they are tailored, but instead they are being penalised. This just builds inefficiency into the market."

The fact that a market can be made safer by preventing trading does not mean it is working well. FRTB appears set to strongly disincentivise holding inventory.

However, in the longer term, the market may well adapt to the new regime. "Clever bankers will find ways to optimise their portfolio to make it not quite so painful, but in the meantime liquidity will suffer," Castro concludes.

JL

Secondary markets

Euro secondary sluggish

Despite last week ending strongly in wider credit the European securitisation secondary market remains sluggish.

Market sentiment continues to be increasingly positive and there are selective buyers in evidence, but for the most part flows and BWIC supply are patchy and liquidity is thin as investors look likely to stay on the sidelines until the wider credit rally has been sustained for a little longer. Consequently, secondary spreads across the board are only tightening gradually.

There are currently no BWICs on the European schedule for today, but there is one French ABS OWIC. Due by 14:00 London time it involves up to €50m each of CAR 2014-F1V A, CFHL 2014-1 A2A, CFHL 2015-2 A1, GNKGO 2013-SF1 A, GNKGO 2014-SF1 A and TTSOC 2015-1 A.

Secondary markets

Euro CLOs take off

Following last Thursday's ECB announcement the European CLO secondary market has finally taken off in terms of both activity and price movement.

"Post-ECB we have been consistently lifted out of bonds with a lot of buying from macro players and fast money," says one trader. "Consequently, levels have moved much, much tighter."

The trader continues: "The biggest moves have been in double- and triple-Bs mainly because they widened the most pre-ECB. Conversely equity has continued to find a bid throughout - yes it weakened and then it tightened but to a much lesser extent because there always seems to be someone axed to buy such paper."

However, not all participants have returned to the market. "There is a feeling that a large number of accounts are still not buying because the moves have been so violent in both directions - for example, triple-Bs went from the 360s to the mid-600s and are now back in the mid-high-400s. Real money investors are just not happy with such big shifts, but if the market now stays stable for a while they'll return and then we'll grind tighter still."

There are currently four European CLO BWICs on the schedule for today. The chunkiest is a three line list due at 14:00 London time that consists of: €10m HARVT 7X D, €15m HEC 2006-2NX C and €10m HPARK 1X B. Two of the bonds have covered with a price on PriceABS in the past three months - HEC 2006-2NX C at 91H on 14 January and HPARK 1X B at 94.7 on 23 February.

Secondary markets

US CLO shift

The tone in the US CLO secondary market continues to shift in a positive direction, but it will be tested today.

"The past two weeks have seen a shift in tone and mezz has kept rallying versus where we were in January and February," says one trader. "That tone has been helped by stability in global markets, but the recent tightening is more to do with a switch in technicals."

The trader continues: "The oil price rally helped leveraged loans and they're off the bottom now. Consequently, the CLO market has gone from very few bidders to rapidly growing numbers of them since the Vegas conference as they first saw value at the then levels and now everyone is chasing mezz paper ever tighter."

However, the trader adds: "There are two large mezz BWICs due today and that will test the rally. We'll finally get a sense of how deep the bid really is."

Overall, there are five BWICs throughout today's US CLO calendar so far. However the focus will be the above-mentioned two mezz auctions, which both fall due at 14:00 New York time.

One is a 41 line $118.425m 2.0 triple- to single-B list that comprises: ANCHC 2015-6A E2, ANCHC 2015-7A E2, ARES 2013-3A E, ATCLO 2012-1A B3L, ATCLO 2014-6A E, AVERY 2014-1A E, BABSN 2014-IIA F, BATLN 2013-4A D, BATLN 2014-5A C, BATLN 2014-5A D, BSP 2013-IIIA D, CAVY 2A E, CECLO 2013-17A D, CVPC 2013-CLO1 D, ECP 2012-4A D, ECP 2013-5A E, ECP 2014-6A C, ECP 2014-6A D1, ECP 2014-6A D2, ECP 2014-6A E, GALXY 2013-15A E, JTWN 2013-2A D, MAGNE 2014-8A F, MVW 2015-9A D, NEUB 2013-15A E, NEUB 2014-16A E, OCP 2013-3A D, OCP 2013-4A D, OCP 2014-5A D, OCP 2014-5A E, OCT14 2012-1A E, RACEP 2013-8A E, SHACK 2013-4A E, SNDPT 2014-1A E, TELOS 2013-4A D, TELOS 2013-4A E, TELOS 2013-4X E, TELOS 2014-5A E, TELOS 2014-5A F, TICP 2014-1A D and VENTR 2012-12A E. None of the bonds has covered with a price on PriceABS in the past three months.

The other is a 12 line $16.88m single-A and triple-B auction consisting of: ACIS 2013-1A C, ARES 2007-12A D, BLUEM 2011-1A D, FIG 2013-2A B, GOCAP 2011-10A CR, HLA 2012-2A C, KVK 2014-1A C, KVK 2014-3A C, MCLO 2014-6A B, MCLO 2014-7A B, SYMP 2012-10A CR and WSTC 2013-1A B. Only BLUEM 2011-1A D has covered with a price on PriceABS in the past three months - at L99H on 8 March.

Secondary markets

Euro secondary mixed

The European securitisation secondary market is seeing mixed activity and results as the wider credit rally runs out of steam.

"Overall, the secondary market continues to normalise, but it is highly sector-dependant," says one trader. "Yesterday was active, but that was mainly off the back of BWICs, while customer flows were slower thanks to softening in wider credit."

Those BWICs yielded mixed results, the trader notes. "They were very positive for CLOs where the rally continues, which bodes well for primary too where I hear the new CVC deal is about to be priced. On the other hand, we also had a mix of UK RMBS in for the bid and prices there are softer - we're seeing a lot of sellers and though prices aren't massively down they are edging lower every session."

Other sectors are much slower, the trader adds. "Prime assets more broadly are very quiet. At the same time, we are seeing a few trades in German multifamily, but that's about it for CMBS and while the news of the Talisman 5 refinancing is credit positive it is yet to have any market impact."

There are currently three BWICs on the European schedule for today. All are due at 14:00 London time.

One is a four line 20.2m euro and sterling UK non-conforming list comprising: ALBA 2015-1 E, NGATE 2007-1X CB, NGATE 2007-2X DB and RMS 28 E. None of the bonds has covered on PriceABS in the past three months.

Another involves five CLOs totalling €8m - ALPST 2X D, JUBIL VII-X E, NPTNO 2007-2A D, WODST II-X D and WODST V-A D. Again, none of the bonds has covered on PriceABS in the past three months.

Last, there is a four line €4.6m original face CLO list consisting of: CORDA 2006-1X A1, HEC 2007-3X A, JUBIL V-X A2 and WODST III-X A2A. Only HEC 2007-3X A has covered with a price on PriceABS in the past three months - at 97.5 on 26 January.

Secondary markets

Euro secondary partly pauses

The bulk of the European securitisation secondary market took a pause yesterday, but CLOs continue to outperform.

"Yesterday was a bit quieter after the pick-up in activity that followed the ECB last week and into the start of this," says one trader. "BWICs have been the main focus but supply dropped as many people used the excuse of the FOMC to return to the sidelines. However, away from the BWICs there continues to be sporadic buying from real money, which is good to see."

Meanwhile, the recent revitalisation in the European CLO market carried on regardless, the trader reports. "We continue to see selling in CLOs and there is a very heavy calendar again today."

The trader continues: "The highlight is a double- and single-B list - it will be very interesting to see where it trades as there's been a fair amount of activity around triple-Bs but there is less clarity around clearing levels for double- and single-Bs. The single-Bs will be particularly interesting given that thanks to capital requirements they have a limited buyer-base."

Overall, there are seven BWICs on the European schedule for today, involving four CLO auctions, two MBS single lines and a UK MBS mix. The above mentioned 11 line €24.1m single- and double-B auction is due at 13:30 London time.

The list consists of: BABSE 2014-2X F, BABSE 2015-1X F, CASPK 1X E, DRYD 2015-39X F, HLAE 2014-1X F, JUBIL I-RX E, ORWPK 1X E, SORPK 1X E, SPAUL 3X F, WODST II-X E and WODST V-X E. Only one of the bonds has covered with a price on PriceABS in the past three months - DRYD 2015-39X F at 72.16 on 10 March.

Secondary markets

Euro secondary upswing

The European securitisation secondary market is seeing an upswing in activity once again.

Yesterday saw an uptick in activity after a quieter Wednesday, although focus remains very patchy. Peripherals fared well as did UK non-conforming, which began to reverse recent widening amid strong execution across the session's MBS BWICs. However, it was CLOs that once again led the way with another active day and improving levels throughout the stack.

There is currently one BWIC on the European schedule for today. Inevitably it involves CLO mezz.

Due at 14:00 London time the three line €7.35m list comprises: CGMSE 2014-3X C, CRNCL 2013-3X DT and JUBIL 2014-14X D. None of the bonds has covered with a price on PriceABS in the past three months.

Structured Finance

SCI Start the Week - 14 March

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

Pipeline
Last week's pipeline additions were heavily weighted toward ABS. There were seven new ABS, one ILS, three RMBS and two CLOs added.

The ABS were: US$422.841m Element Rail Leasing II 2016-1; US$1bn Ford Credit Auto Lease Trust 2016-A; US$395m OneMain Financial Issuance Trust 2016-2; US$312m Prestige Auto Receivables Trust 2016-1; US$300m Sierra Timeshare 2016-1; US$650.7m Synchrony Credit Card Master Trust Series 2016-1; and US$858m World Omni Auto Receivables Trust 2016-A.

US$175m Aozora Re 2016-1 was the ILS, while A$500m IDOL 2016-1, Offa 1 and Pepper 16 accounted for the RMBS. The CLOs were US$401.5m Carlyle Global Market Strategies CLO 2016-1 and US$358.5m Wellfleet CLO 2016-1.

Pricings
The week's prints consisted of five ABS, three RMBS and two CMBS. The sole CLO was US$470m Oaktree 2016-1.

The ABS were: US$440m California Republic Auto Receivables Trust 2016-1; US$991.28m Capital Auto Receivables Asset Trust 2016-1; US$493.5m Conn's Receivables Funding 2016-A; US$179.68m Lendmark Funding Trust 2016-A; and US$1.3bn MBALT 2016-A.

€540m FT RMBS Prado 2, A$300m Liberty Series 2016-1 and US$475m STACR 2016-HQA1 were the RMBS. The CMBS were US$1bn GSMS 2016-ICE2 and US$350m GSMS 2016-RENT.

Markets
US ABS sentiment was unchanged by the recent industry conference and tiering remains pronounced. JPMorgan analysts comment: "Plain vanilla, cash surrogate ABS continue to see strong demand. For example, in secondary, short credit card floaters have traded very well in recent weeks."

Corporate spreads to US agency RMBS have tightened significantly over the last couple of weeks, which Citi analysts note will support the RMBS basis. "Double-A corporate spread to production coupon Treasury ZV spreads currently stands at 16bp, compared with around 42bp in the middle of February," they say. "The spread pick up is back to the levels in June/July 2015 before investors started pricing China and Europe related risks."

Editor's picks
Increased appetite: Direct lenders tend to focus on assets that aren't mainstream securitisation candidates and in that sense can be complementary to banks. However, panellists at SCI's inaugural Marketplace, Direct Lending & Securitisation Seminar last month expected European direct lenders to gain more market share as the sector transitions towards the US model...
Energy boost: Renovate America capital markets md Craig Braun and capital markets svp Adam Garfinkle answer SCI's questions...
ECB looks to provide boost: A new set of measures announced by the ECB could boost ABS supply. The central bank is launching a second TLTRO programme, expanding QE and cutting rates...
CLOs cut oil exposure: While the oil and gas sectors have been a relatively small part of the leveraged loan universe, US CLO exposure to these sectors varies greatly across deals. Combined with idiosyncratic issues in other sectors, the impact on CLOs has been significant, particularly at the most credit sensitive tranches of the capital structure...

Deal news
• Apollo Credit Management has refinanced the US$120m class A1b notes from its ALM VIII CLO, marking the first refinancing transaction in the sector since September. The tranche was redeemed at par, plus US$272,856 interest, by issuing replacement securities.
• Rongteng 2016-1 Retail Auto Mortgage Loan Securitization is originator SAIC-GMAC's first Chinese auto ABS to feature a revolving structure and the second such deal to be issued in China's interbank market, says Moody's. The transaction was issued last month (see SCI's new issuance database).
• Navient has extended the legal final maturity date to 2055 on the senior tranche of SLC Student Loan Trust 2009-1, affecting US$150m of ABS bonds backed by federally guaranteed student loans. The move follows the amendment of transaction agreements for two other Navient-sponsored securitisation trusts last month.

Regulatory update
• The European Supervisory Authorities (ESAs) - EBA, EIOPA and ESMA - have published the final draft regulatory technical standards (RTS) outlining the framework for EMIR. The standards cover margin requirements for non-centrally cleared OTC derivatives.
• An Italian law decree introducing a flat tax on auction properties is credit positive for RMBS, ABS and covered bonds of secured loans to SMEs, says Moody's. The stamp duty exemption should attract a larger number of potential buyers, with a particular increase in short-term investors' appetite for auction properties.
• A Russian law strengthening limited recourse and removing restrictions on repurchasing mortgages on securitised pools is credit positive, says Moody's. For future RMBS transactions which use the limited recourse feature, creditors' claims upon enforcement of the pledged collateral will be limited only to specific assets.
• The California Public Employees' Retirement System has settled its case against Moody's for a record US$130m. The lawsuit alleged that Moody's assigned erroneous Aaa ratings to SIVs prior to the financial crisis.

Deals added to the SCI New Issuance database last week:
BPL Mortgages (2014 SME) (restructuring); Caixabank RMBS 1; CARS MTI-1 series 2016-1; Citi Held for Asset Issuance 2016-MF1; Citrus Re series 2016-1; COMM 2016-DC2; Denali Capital CLO XII; Driver Australia Three; FREMF 2016-KF14; Galileo Re series 2016-1; Lendmark Funding Trust 2016-A; Medallion Trust series 2016-1; Nationstar HECM Loan Trust 2016-1; Navient Student Loan Trust 2016-1; SoFi Professional Loan Program 2016-A; STACR 2016-HQA1

Deals added to the SCI CMBS Loan Events database last week:
COMM 2014-UBS3; DECO 2007-E5; ECLIP 2006-1; GCCFC 2006-GG7; GMACC 1997-C1; GSMS 2007-GG10; JPMCC 2007-CB19; JPMCC 2013-C10; MLCFC 2007-5; MLCFC 2007-7; MLMT 2004-KEY2; MSC 2007-T27; UBSBB 2012-C4; WINDM VII

CDS

Indices ready to roll

Markit iTraxx indices roll to Series 25 on Monday 21 March. There are set to be 12 name changes for the Crossover index and four for iTraxx Main, while the senior and sub financials indices will be unchanged.

Bank of America Merrill Lynch analysts estimate S25/S24 rolls of +0bp, -26bp, +8.4bp and +8bp for the iTraxx Main, Crossover, senior and sub financial indices, respectively. There will be no rule changes and the Crossover index will remain at 75 names.

"Post the recent announcement by the ECB of the corporate bond QE program, we see the bond liquidity backdrop deteriorating. This will likely push more investors in the CDS market to find liquid and scalable longs, and thus CDS indices will become the vehicle to replicate cash longs," say the analysts.

"This will keep the lid against significant widening should oil prices decline or the macro outlook deteriorate again. Risks to this will remain a potential investors' shift back to 'Quantitative Failure'."

iTraxx Main is expected to outperform senior financials. Investors have been using that index and the Crossover index as liquid longs on the credit market, which is a trend that should only strengthen as the ECB continues QE (SCI 11 March).

"With a large long-base now built on the non-dealers side, we feel that the interest to roll shorts into the new indices (S25) will be less apparent than what we have seen historically. Actually, we see more pressure to roll longs out of both of these indices into better quality S25 portfolios," note the analysts.

This trend has been seen in both the Main and Crossover indices over the past two rolls. This time around Isolux and Portel will leave the Crossover index because of how wide they are trading, so the new portfolio will be of higher quality, with a thinner tail and less single-name jump-to-default risk.

That also happened last time as Norske and Abengoa left the index (SCI 17 September 2015). The average spread of the new portfolio should be around 30bp tighter than the old one.

"The higher quality of the XO S25 portfolio - on an average spread basis - will make investors keen to roll their longs into the cleaner and newer portfolio. We expect the S25/24 Crossover roll to trade inside fair values," say the analysts.

Investors with long interest in the Crossover index have preferred to roll into the new portfolios on each of the last two rolls, with the same expected this time around. The analysts predict the change of skew will be almost 1%-2% of the index spread, which equates to a change of skew of -3bp to -6bp.

For the iTraxx Main index a marginal positive change of skew is expected, although the departures of Anglo American, Repsol and Casino should result in pressure on the S25/S24 roll to trade lower than fair values. "As the new series will have less exposure to metals/miners and emerging market names, we expect the roll to trade a touch tighter than fair values to start with," the analysts say.

JL

CLOs

Mixed approaches to Valeant risk

Valeant, the single biggest obligor in US 2.0 CLOs, continues to generate negative headlines. However, CLO managers appear to be divided on Valeant risk.

Valeant has missed its 4Q15 forecasts and offered a bleaker forward outlook than the market expected. It has also sought to waive the cross default provision related to the delayed filing of its annual 10-K.

Moody's has downgraded Valeant's corporate family rating from Ba3 to B1 and senior secured rating from Ba1 to Ba2. The rating agency keeps Valeant on negative rating review, which S&P has also just done; S&P has placed Valeant's corporate credit rating, senior secured debt and senior unsecured debt on review.

Citi analysts note that senior secured loans softened on Tuesday. Of 851 outstanding US CLOs, there remains US$3.7bn of Valeant exposure across 737 deals and 112 managers. That represents around 1% of CLO collateral, with deal exposures ranging from 0% to 4.5%.

CLO managers are taking different approaches to the Valeant risk. "While some are more hesitant to hold or add Valeant risk in low 90s when the stock is so volatile, others are taking advantage of the loan sell-off and buying to build par in the deal," say the analysts.

They add: "For example, some managers added risk at around 93 in Q4 and more around 96 earlier this year, while some others took losses in Q4 but added later. Managers who sold also include ones profiting from trading the name and ones completely moving out of the risk."

CLO purchases have outweighed CLO sales and debt paydowns. A quarter of CLO 2.0 mangers have increased their Valeant exposure since December, while about 10 have sold. As a result, CLO 2.0 exposure increased by US$101.5m, although CLO 1.0 exposure reduced by US$55m.

The analysts attribute the risk-adding to the expectation that senior secured loans would be covered in a recovery scenario, regardless of a very poor 4Q15 and outlook. While an event of default is possible if the 10-K is not delivered by May without a waiver, this is considered unlikely by both Citi and Moody's.

JL

CMBS

CMBS 'looking cheap'

US CMBS spreads remain significantly wide of competing corporate spreads. Despite extra volatility justifying some spread pick-up, single-A CMBS paper is now looking particularly cheap.

Double-As are 125bp wider than corporate single-A seven- to 10-year spreads, having averaged only 60bp wider over the past few years, note Citi analysts. Single-A spreads pick up more than 200bp over corporates, despite a long-term average of just an extra 53bp.

However, CMBS spreads have also been much more volatile than corporate spreads. The Citi analysts derive a fair value spread by taking historical volatility into account and find that, on the basis of spread per unit of spread volatility, single-A CMBS investors are being compensated 7.95 times the spread volatility, but corporate triple-B investors are receiving 6.68 times spread volatility.

The current CMBS single-A spread of swaps plus 500bp has a standard deviation of 63bp across the past few years. Assuming the an investor would accept the same spread per unit of spread volatility for CMBS as for corporate paper, the fair value spread for CMBS single-A would be 63bp multiplied by 6.68 - ie; swaps plus 421bp.

"This would imply that the current swaps plus 500bp spread is 79bp cheap on a volatility-adjusted basis. In this respect, the single-A is the most attractive point along the curve. The triple-A through triple-B minus current spreads are cheap to the fair value spreads by 11bp to 79bp," comment the analysts.

JL

RMBS

SFR exposure encouraged

SFR transactions offer value to STACR, CAS, legacy RMBS and consumer ABS deals, argue Wells Fargo analysts. However, there is only limited upside when compared to single-borrower and large loan CMBS.

"We believe that triple-A and double-A rated SFR bonds should be viewed as a diversifier within a portfolio containing non-agency CMBS or non-agency RMBS. However, we do not see senior SFR exposure as a pure alpha trade," say the analysts.

The Wells Fargo analysts note that SFR bonds provide diversification within a non-agency RMBS allocation. This is because the underlying collateral should react differently to non-agency RMBS in the event of changes to consumer credit availability, homeownership rates or macroeconomic growth.

"From a portfolio optimisation perspective, we believe the addition of SFR bonds to specific portfolios should generate incremental alpha. The still-developing secondary market allows buy-and-hold investors to take advantage of wider spreads in SFR transactions. When spreads begin to tighten broadly, in our opinion, single-A rated SFR spreads, given the relative underperformance since 2Q15, could benefit to a greater degree than other SFR tranches and legacy RMBS," say the analysts.

Historical performance data is limited for SFR deals, yet property pools continue to post lower-than-expected vacancy rates and retain close to a 75% tenant renewal rate. Based on an application of stress factors to rating agency estimates for revenues, vacancies, expenses and expenditures, the analysts believe the middle of the structure - particularly class C notes - can offer the most value.

Triple-A and double-A SFR bonds have underperformed similarly rated CLOs since last June. Triple-A and double-A SFRs have widened 38bp and 41bp during 1Q16, while triple-A and double-A CLOs have widened 10bp.

"We believe SFR bonds should trade wide to CLOs. Arguably, in 2Q15, the spread differentials between triple-A and double-A SFR bonds and CLO did not accurately reflect the liquidity difference between the two asset classes. In our opinion, SFR bonds become more interesting in the middle of the capital stack, specifically single-A and triple-B plus rated tranches," say the analysts.

The analysts believe single-A rated SFR bonds are attractive versus CRT deals, legacy RMBS and ABS floaters. Generic single-A SFR tranches offer around 230bp over credit card ABS, 205bp over STACR M1, 165bp over CAS M1 and 125bp over generic legacy RMBS.

JL

RMBS

Safe harbour RMBS debuts

JPMorgan is in the market with what is believed to be the first US RMBS structured to comply with the FDIC's 'safe harbour' rule, which became effective on 30 September 2010 (SCI 6 October 2010). The US$1.89bn Chase Mortgage Trust 2016-1 transaction also represents the first post-crisis cash RMBS issuance by a large money-centre bank of its own assets.

Unlike other RMBS that transfer mortgage loans to the trust as legal true sales to achieve de-linkage from the effects of a sponsor insolvency, Chase Mortgage Trust 2016-1 has been structured under the securitisation safe harbour rule to mitigate the risk of the FDIC's exercise of its repudiation power in the unlikely event that it becomes the receiver of JPMorgan. A safe harbour transaction requires that P&I payments must be primarily based on the performance of the assets that are transferred to the issuer and not contingent on market or credit events that are independent of the assets.

Provisionally rated by Fitch and Moody's, the transaction consists of US$1.66bn AAA/Aaa rated class A notes, US$42.46m AA-/Aa1 M1s, US$74.54m A/Aa3 M2s, US$50.01m BBB/Baa2 class M3s, US$25.48m BB/Ba3 class M4s and a US$38.69m unrated B tranche. JPMorgan will retain 5% of each class of certificates to comply with FDIC safe harbour provisions, effectively providing some risk retention and aligning its incentive with investors in the transaction, according to Moody's.

CMT 2016-1 incorporates several features unique to post-crisis RMBS that are credit positive for bondholders in the transaction, especially senior bonds. Among these features is a pro-rata payment structure with multiple and more stringent performance triggers than other post-crisis transactions. The triggers redirect to the more senior notes cash that would otherwise go to the junior notes in the event of performance deterioration.

Additionally, lack of principal and interest servicer advancing is expected to boost ultimate liquidation recoveries on delinquent loans available for senior bondholders. The lack of P&I advancing should also reduce the unpredictability of cashflows driven by servicer stop advance policies or practices.

The transaction mitigates disruption of cashflow to the bonds and resulting interest shortfalls due to the lack of P&I advancing by providing for interest payments and principal payments to be paid from aggregate available funds. JPMorgan is also obligated to make protective advances in respect of certain taxes, insurance premiums and the cost of the preservation, restoration and protection of the mortgaged properties and any enforcement or judicial proceedings.

Finally, immediate recognition of modification losses allocates more cash to senior bonds because written-down junior bonds accrue less interest.

The certificates are backed by one pool of 6,111 high credit-quality 30-year first-lien, fixed rate conforming (75%) and prime jumbo (25%) residential mortgage loans. All of the loans were originated by Chase or one of its correspondent lenders in accordance with its origination guidelines.

The loans have a remaining term to maturity of 343 months and a weighted average seasoning of 14 months. The WA original FICO score is 768 and the WA combined original loan-to-value ratio is 79.6%.

Fitch notes that 25.4% of the pool is in California, but is well diversified at an MSA level. In terms of geographic concentration, the top five states account for 54.6% of the collateral.

AMC Diligence reviewed the 758 non-conforming loans and randomly-selected 829 conforming loans for credit, compliance, appraisal and data integrity. Any data discrepancies observed were repaired and updated on the loan tape.

Further, JPMorgan has provided clear representations and warranties - including an unqualified fraud R&W - and a provision for binding arbitration in the event of dispute between investors and the R&W provider concerning R&W breaches. A repurchase reserve fund will also be established, which will be held for 12 months and initially equal at least 5% of the cash proceeds from the securitisation.

Finally, all non-conforming loans adhere to the ability-to-repay (ATR)/qualified mortgage (QM) rule, while the conforming loans were underwritten to Fannie Mae and Freddie Mac guidelines.

CS

Structured Finance

Credit duo to lead Euro expansion

Waterfall Asset Management has recruited James Cuby and Henrik Malmer in order to set up a London office for the firm. The pair will act as co-heads of the office, tasked with expanding Waterfall's structured credit and direct lending business in the European market.

Cuby and Malmer spent the last ten years at Investec Bank, where they established and ran its credit investments business. Before that, Cuby was a partner at Prytania Investment Advisors and an associate at S&P, while Malmer was a vp at Wachovia Securities and traded ABS/CDOs at Bear Stearns.

Structured Finance

Shareholder alignment announced

Apollo Investment Management, in consultation with its board of directors, is set to reduce its fees for fiscal year 2017. From 1 April 2016 through 31 March 2017, the base management fee will be reduced to 1.50% on gross assets. In addition, the calculation of the incentive fee will include a performance adjustment that could lower the incentive fee rate to as low as 15%, based on the company's cumulative change in net asset value during the period.

In addition, Apollo Global Management will embark on a programme to purchase US$50m of Apollo Investment's common stock, subject to certain regulatory approvals. Under the programme, shares may be purchased from time to time in open market transactions.

Combined with the fee reductions, the company says that this share purchase programme demonstrates Apollo Global Management's support for Apollo Investment and will further align Apollo Investment's shareholders with Apollo Global Management and its employees, who may receive a portion of the shares in the form of compensation. Including this US$50m investment, Apollo Global Management's total investment in Apollo Investment will be approximately US$118m.

Structured Finance

EMEA trust head appointed

BNY Mellon has promoted Tom Ahern to head its corporate trust business in the EMEA region. He previously led BNY's corporate trust business in Ireland, while simultaneously leading the global analytics functions for the corporate trust operation.

Ahern's background includes working in CLOs and loan administration. He has worked additionally in BNY's structured portfolio services business within EMEA corporate trust. Prior to this, he worked with Bank of Ireland, Daiwa Securities and Colonial First State Investments.

Risk Management

Quant leader appointed

Marketplace lending analytics provider PeerIQ has hired Wilfred Daye as md, quantitative strategies. He will head the firm's quant team and be based in New York.

Daye spent the last six years at UBS, covering numerous securitised asset classes, including marketplace lending ABS. He brings diverse experience on the buy-side and the sell-side, having also spent time at Deutsche Bank, DB Zwirn, Lehman and Barclays.

ABS

Spanish electricity debt falling

The fall in Spanish electricity tariff deficit (ETD) debt suggests that more sustainable levels could be reached by 2018 and 2019, says Moody's. Outstanding ETD debt was cut by 7% to €26.9bn in 2014 from €28.8bn in 2013.

"Cumulative electricity tariff debt could fall below 100% of regulated revenues by 2019," says Antonio Tena, a Moody's avp and analyst. "The current legal framework strongly protects the commitment to reach electricity system sustainability. Ongoing surpluses would significantly contribute to the system's deleveraging."

Tena explains that legal reforms are beginning to yield results in taming Spain's ETDs. Reduction measures, including cost cuts on regulated activities, have combined with new sources of revenue such as corporate taxes to help rebalance the system.

Moody's suggests that policymakers could implement regulatory changes to reduce prices for end users, with the aim of helping them keep more of their disposable income. In a standard end user's electricity bill, more than half of the payment goes toward system costs. Because of this, a significant reduction in the regulated part of the end user's electricity bill could jeopardise ETD repayments.

However, system revenues have grown in recent years, while costs are declining. This has been driven by the downward adjustment on public subsidies to renewable energy to €6.8bn in 2014 from €9.3bn in 2013 - a 27% decrease.

Following very high deficits in recent years, Moody's says a larger-than-anticipated surplus in Spain's electricity sector is credit positive for ETD securitisations because it implies that amortisation will be faster than scheduled. This is because all ETD debt, regardless if such debt is generated in the past or will be in the future, ranks pro rata in the priority of payments in the electricity sector.

ABS

Solar ABS breaking out

US solar securitisation is set to become a mainstream financing option in the ABS market in 2016 and will achieve new issuance records, according to a new white paper by Marathon Capital. This year has already seen a total of US$235m in deals, exceeding the US$234m that hit the market in the entirety of 2015.

Last year saw a first for the market when it involved multiple distributed solar financiers attempting to issue deals within the market. However, only SolarCity and Sunrun have completed issuances, with the former contributing to all but one. Sunrun also closed a US$250m senior secured credit facility with Investec on 19 January, which will be used to aggregate residential solar assets until sufficient scale is achieved for a securitisation.

However, the paper suggests that several other distributed solar financiers are reported to be now considering securitisations. The growing number of competitors include SunPower, Vivint Solar, Sunnova, Sungevity and Spruce Finance. Marathon says that such energy providers have demonstrated the ability to deploy MW at scale to issue a deal, without formally announcing their intent.

Favourable yields are playing a significant role in the increased attraction of solar ABS. Marathon suggests that this is in part due to weak macro conditions. The most recent deal in the market - SolarCity's LMC Series V - posted a 6.25% blended yield, which is up from the 4.8% yield that was posted by its inaugural deal in November 2013 (LMC Series I).

Nonetheless, the paper warns that the Nevada Public Utilities Commission's net metering decision may have increased perceived policy risk for distributed solar deals. The state regulator cut the rates at which consumers with installed rooftop solar systems can sell excess power to the electric grid and prompted Moody's to suggest other states could follow the precedent (SCI 11 January).

The paper also says that solar deals will have a generally higher cost of capital and lower advance rate than traditional securitised asset classes due to greater expected loss given default. Recently, investor acceptance of the asset class has seen advanced rates move up from 60% to 75%.

Such issues will arise in spite of an eventual developed, proven track record for the asset class as it continues to gain popularity. One reason is that while originators report recovery rates above 90% when homes are transferred to new owners, in the long term the primary investor consideration for expected loss given default will likely be the sustainability of electricity bill savings to the offtaker.

The paper suggests though that this will coincide with solutions that make solar deals more efficient. This will include strategic investments in back-up servicers, increasing issuance sizes to boost secondary liquidity and altering underwriting criteria to help boost increased geographical diversification.

ABS

Negative FFELP watches continue

Fitch has maintained rating watch negative on 106 FFELP trusts as a result of concerns that tranches could miss legal final maturity dates. The scale of possible rating actions will depend on the remaining time to maturity, recent payments trends, issuer actions and external factors, with triple-A ratings possibly being lowered to non-investment grade.

The rating agency has identified trusts where one or more individual tranches are most at risk of missing their legal final maturities under various stressed rating scenarios. The main drivers of the heightened maturity risk are prepayments and principal repayment rates coming in more slowly than initial expectations.

ABS

YSOC first for Chinese ABS

Mercedes-Benz is bringing the first auto ABS deal to China to include a yield supplement overcollateralisation (YSOC) feature. The CNY2.5bn Silver Arrow China 2016-1 deal is also the car manufacturer's debut transaction in the Chinese market.

The CNY2.37bn class A notes have been rated Aa3 by Moody's, while the CNY125m subordinated notes are unrated. All the notes in the deal have a legal maturity of 26 November 2022 and most of the loans are fully amortising with fixed interest rates.

The YSOC feature provides extra credit enhancement, compensating for some of the underlying loans that earn low or zero interest. The initial YSOC balance is CNY26.67m, while target OC is CNY301.67m. 

The YSOC amount for each payment date is pre-calculated as of cut-off date and stated in the transaction's document at closing. Moody's notes that such amounts will reduce every month after the closing date. The YSOC amount will be used to calculate the principal distributable amount payable to the class A notes.

ABS

Marketplace lending carries unique risks

Marketplace lending carries risks unique to the asset class, says Moody's. The rating agency makes the observation as interest in the sector continues to grow, and reinforces its previous analysis about the asset class.

Moody's notes that marketplace lending platforms may underwrite the loans but do not have skin in the game as they do not bear actual borrower credit risk. As a result, "a potential misalignment of interest exists in that a platform might loosen underwriting standards to boost origination volumes", says Aishwarya Dahanukar, a structured finance analyst at Moody's.

The agency also highlights that there is uncertainty about the regulatory environment. As marketplace lending has grown, so regulators in Europe and the US have become more interested in the sector, which could lead to new legislation with unforeseen consequences.

Equally, a unique risk factor for marketplace lending is that it has grown during a benevolent credit cycle and is yet to experience a downturn. Marketplace consumer loan pools originated in Europe are therefore unseasoned due to the recent growth of the sector. How marketplace loans will perform during a more turbulent economic period, or in a rising interest rate environment, has therefore yet to be seen.

In addition, marketplace platforms operate entirely online and have built a reputation on a greater ability than traditional lenders to analyse borrower creditworthiness with advanced algorithms and technology. Being entirely online however opens platforms up to a greater risk of fraud and cyber security risks such as hacking. Moody's highlights that traditional in-store lenders still have the added benefit of in-person meetings, which helps mitigate identity fraud risk.

Moody's placed the ratings of three marketplace ABS on review for downgrade last month as a result of an unexpectedly rapid build-up of delinquencies and charge-offs (SCI 25 February).

ABS

Low APAC auto delinquencies predicted

A combination of low interest rates and positive credit factors will keep APAC auto loan ABS delinquencies low in 2016, according to Moody's. Countries with high delinquencies, such as India, could also benefit from a significant drop.

Moody's explains that the asset class will benefit from supportive economic backdrops in certain markets, low rates, strong loan and borrower characteristics, and diversified collateral pools comprising a wide range of borrowers and geographic locations. Auto ABS deals also contain a number of positive features, including static collateral pools, sequential principal repayments and performance-based triggers.

By region, Japan is expected to see delinquencies remain stable at their current low levels. Unemployment levels are at historic lows, which in turn has left employed borrowers able to make loan repayments.

However, Moody's says that Australia and China will see rises in delinquencies, albeit from low levels. This is reflective of their respective slowdowns in economic growth. Delinquency levels will still remain low for both, with China particularly assisted by supportive interest rates.

Indian delinquencies have been relatively higher than the other key markets in the region, but will drop in line with accelerating domestic economic growth. The majority of auto loans backing Indian auto ABS comprise commercial vehicle loans. Moody's says that borrowers in such cases will benefit from higher economic growth and low oil prices.

ABS

Annual contracts pose risk to ABS

The inclusion of annual pay contracts in equipment ABS increases the risk on the deals' short term notes, says Moody's. Structures that includes money market tranches often have a significant portion of such contracts, with agricultural-linked deals particularly exposed to them.

Moody's believes the seasonality of these contracts could create volatility for equipment ABS. A concentration of the contracts in the few months near the legal final maturity date of a tranche is credit negative, the agency adds. A sudden spike in delinquencies or defaults at the time the contracts' payments are due could leave insufficient cashflows to repay the short term notes by their maturity deadline.

In contrast, a portfolio mostly made up of monthly pay contracts evenly spread throughout the first year of the transaction would likely be able to absorb a delinquency or default shock more easily. This would allow for the timely payment of the money market tranche.

However, Moody's suggests that certain structural mitigants and characteristics could help offset the risk. These include high prepayment rates in the portfolio, which would allow for the pool to amortise quicker and the money market tranche to pay off faster.

Seasoning could also play a helpful role, as it provokes a high proportion of principal payments within the first months after closing. A seasoned pool is likely to amortise faster because the principal component of the contract instalments increases as the contracts age.

Finally, turbo payments could also be effective mitigants. Aligned with the availability of a reserve fund for credit support, they would provide for the excess spread to pay down the money market tranche. The higher the excess spread, the more useful the feature would work as a mitigant, and would also prevent the equity holder from having to use excess cash to cover the payments.

Structured Finance

Resi, CRE auction platforms launched

Ten-X, formerly known as Auction.com, has launched two new transaction platforms for buying and selling residential and commercial real estate. Ten-X Homes has been created for move-in ready homes, while Ten-X Commercial is the next iteration of the firm's CRE offering.

Ten-X Homes will offer homes from a wide range of sellers, including banks, investors, institutions, homebuilders and agents. It will have a national footprint, but is initially launching in Dallas, Denver, Miami and Phoenix.

Ten-X Commercial will offer three transaction options. These are the firm's signature online auction offering Live-Bid, a two-step process dubbed Managed Bid with sealed indicative bids before a scheduled online auction, and a non-auction offering called Offer Select.

While Auction.com has rebranded as Ten-X, it will continue an Auction.com line of business alongside its Ten-X Homes and Ten-X Commercial lines. The Auction.com line will focus exclusively on the sale of residential bank-owned and foreclosure properties.

Structured Finance

Italian SPV rules amended

The Bank of Italy has updated its supervisory instructions for banks and financial intermediaries concerning loans granted by securitisation vehicles. There are now six key requirements.

First, borrowers must be selected by a bank or financial intermediary registered under article 106 of the Italian Banking Act. The securities issued are reserved for qualified investors only, and the bank or intermediary must retain a significant economic interest in the transaction.

The entities selecting the borrowers must apply the same criteria and procedures as they usually use to assess creditworthiness, as well as their usual risk control and credit quality supervision procedures. Finally, the servicer is required to verify that the retention rule has been respected, procedures for the selection of borrowers have been properly carried out and that investors received sufficient disclosure of information.

Structured Finance

Indian distressed opportunities targeted

The Canada Pension Plan Investment Board (CPPIB) and Kotak Mahindra Group have signed an agreement to invest in stressed assets in India. The agreement allows for a total investment of up to US$525m, with CPPIB able to invest up to US$450m.

The flexible investment mandate seeks to take advantage of the growing opportunity arising from the current stress in the Indian banking and corporate sectors. It will provide bespoke financing solutions to companies and invest in stressed asset sales by banks.

Structured Finance

ECB suggests regulatory tweaks

The ECB has suggested changes to the new securitisation package proposed by the European Commission and adopted by the European Council in December. The package contains the new overarching European securitisation regulation - including STS - as well as the CRR amendment that sets banks' risk weights to securitisation exposures.

On the topic of supervision, Rabobank credit analysts note it is clear that the ECB is not keen to act as the securitisation market's regulator. "They are the supervisor of the biggest banks, but they don't want to guard the STS framework, for example," the analysts say.

On the topic of the STS framework, the ECB notes that most criteria are clear, but that some require further specification. The central bank proposes to mandate the EBA, ESMA and EIOPA to define these criteria further.

The ECB recommends that the burden of providing all documents to prospective investors could be alleviated for bilateral or intra-group transactions and, on the topic of third-party verification, it opposes a legal role in the framework for third parties - despite acknowledging certain benefits. "This stance is at odds with the reaction from stakeholders in the sector itself, which see a clear role for PCS and similar third-party verifications," the Rabobank analysts comment.

Although the ECB shares the view that sanctions are necessary for false STS attestations, it believes these sanctions should be softened so as not to put sellers off bringing transactions to the market. It also does not believe that the ERBA method - one of three ways to assign risk weights to securitisations - should be allowed for STS securitisations.

The securitisation package is currently with the European Parliament and the analysts expect a vote late this year or early next year. Therefore, further amendments could well be made and the ECB's opinion is likely to carry significant weight.

CDS

Energy credit event called

ISDA's Americas Credit Derivatives Determinations Committee has resolved that a failure to pay credit event occurred in respect of Pacific Exploration & Production Corporation (formerly known as Pacific Rubiales Energy Corporation). The move follows an agreement between the company and holders of its 5.375% senior notes due 2019 and its 5.625% senior notes due 2025, pursuant to which the noteholders will forbear from declaring the principal amounts of the notes due and payable until 31 March.

The forbearance is in respect of the company's decision not to make the scheduled interest payments under the notes due on 19 January (in the case of the 2025 notes) and 26 January (in the case of the 2019 notes) and to utilise a 30-day grace period to assess strategic alternatives with respect to its capital structure. The requisite number of its bank lenders have also approved the forbearance agreements.

The DC will reconvene tomorrow (15 March) to discuss whether to hold a CDS auction in respect of the credit event.

CDS

ICE expands CDS clearing

ICE has introduced CDS clearing for the iTraxx Australia and iTraxx Asia ex-Japan IG indices, as well as for certain sovereigns. These are Australia, China, Indonesia, Korea, Malaysia and the Philippines.

ICE Clear Credit now clears 27 sovereign names across Europe, Africa, Latin America and the Asia Pacific region, while ICE Clear Europe clears seven sovereign CDS names in Europe. It also clears CDS on more than 400 corporate single names.

CDS

CDS pricing service sold

Markit has acquired Fitch's CDS pricing service. As part of the agreement, Fitch will integrate Markit's own CDS pricing as a component of its risk analytics, implied ratings and other derived services. Markit's service provides pricing data on CDS single names, indices and tranches. Details on the financial terms of the acquisition were not disclosed.

CLOs

Energy weighs on CLOs

The energy sector is driving credit deterioration within US CLOs, observes Moody's, which was a key factor in worsening WARFs in 2015. The median WARF dropped for both CLO 1.0s and 2.0s last year, with the former moving up to 2411 from 2399 and the latter from 2772 to 2782.

Rating downgrades to energy and commodity sector issuers is weighing down on the asset class. In December alone, Moody's downgraded Sheridan II, Peabody Energy and Offshore Group Investment. The three companies are held in a combined 359 CLOs.

US CLO WARF levels are expected to come under further pressure in early 2016 due to the downgrade of Fortescure Metals Group from Ba3 to Ba2 - a commonly held issuer in approximately 156 CLOs with average exposure of 0.97%. In light of its recent woes (SCI 17 March), Valeant, which is held in around 700 US CLOs, could also add to the pressure with a potential downgrade.

In contrast, the median European CLO 1.0 WARF improved from 2959 to 2925 in 2015, while European CLO 2.0s saw a move from 2673 to 2646. Further, the median senior OC ratio among both US and European CLO 1.0s improved as a result of continued note amortisation.

US CLO 1.0s registered a 97bp OC increase to 150.22%, while the European CLO 1.0 median increased by 163bp to 195.24%. The median junior OC ratio also increased for European CLO 1.0s, by 31bp to 109.52%. This is due to some deals redeeming their senior notes in November.

CLOs

German SME CLO defaults dropping

The fall in German corporate insolvencies in 2015 will help stabilise German SME CLO deals, says Fitch. The transactions will mostly benefit from a knock-on reduction in default rates, which are already declining.

Germany's Federal Statistical Office said last week that the country's local courts had reported 23,123 business insolvencies in 2015, which was down 4% on the previous year and at the lowest level since the start of the current time series in 1999. The last recorded annual rise in business insolvencies was in 2009, immediately after the onset of the global financial crisis.

Fitch says that this trend is consistent with private sector data from firms such as Creditreform and Euler Hermes. Following an update of its global rating criteria, the rating agency reduced its average annual default rate expectation for German SME CLOs earlier this month, moving it down from 2.5% to 1.75%.

In addition, it says that the macroeconomic environment will support German SME performance. Fitch's real GDP growth forecasts of 1.7% this year and 1.8% next year incorporate growing private consumption underpinned by sound household fundamentals, a tight labour market and low inflation boosting real disposable incomes.

Nonetheless, a steady improvement in economic growth and record-low insolvencies has prompted the agency to suggest that the scope for further default reductions is limited.

CMBS

Airbnb threat to CMBS 'minimal'

Moody's suggests that the supply and demand imbalance from overbuilding in the hotel sector poses a greater threat to US lodging sector CMBS than peer-to-peer home renting platforms such as Airbnb. This is in spite of the latter's continued growth.

"Airbnb has had a remarkable growth trajectory," says Moody's vp and senior analyst Jay Rosen. "But the company competes for leisure guests mainly with lower-priced hotels that are unaffiliated with major hotel brands."

Airbnb is less competitive for business travellers than higher priced, traditional brand name hotels. Given the construction that is currently planned or underway in the hotel sector, excess supply is therefore a more likely near-term threat to traditional lodging-backed CMBS loans.

The majority of travellers who book accommodation through Airbnb still view price as a key determinant and mostly travel for leisure. These factors reduce the competitive threat to higher priced hotels that will likely focus on offering conference facilities and amenities for corporate users such as spas, room service and in-hotel dining.

Moody's adds that Airbnb faces challenges from increased governmental scrutiny, regulations and taxation that aim to protect affordable housing. Nonetheless, the agency expects peer-to-peer accommodation companies to remain a viable alternative to lower-priced hotels, and to continue to grow.

CMBS

Delinquencies continue to decline

US CMBS delinquencies declined by 2bp in February to 2.91% from 2.93% a month earlier, according to Fitch's latest index results for the sector. In total, resolutions of US$980m outpaced new delinquencies of US$751m. Fitch-rated new issuance volume of US$703m (one transaction) in January was far outpaced by US$4.8bn in portfolio run-off, causing a decrease in the index denominator.

The largest new delinquency last month, which caused a spike in office late-pays, was the US$150m James Center (securitised in GMACC 2006-C1 and GECMC 2006-C1). The loan experienced a maturity default in January. Prior negotiations for a loan modification are no longer occurring and the special servicer is expected to move forward with foreclosure this month.

Meanwhile, the largest resolution was the US$190.8m Gulf Coast Town Center Phase I & II (CSMC 2007-C5), which was liquidated with a 23% loss severity.

Current and previous delinquency rates by property type are: 4.67% for retail (from 4.96% in January); 4.03% for office (from 3.82%); 3.11% for hotel (from 3.41%); 3.48% for industrial (from 3.38%); 3.25% for mixed use (from 2.57%); 0.84% for multifamily (from 0.82%); and 0.73% for other (from 0.90%). The spike in the mixed-use rate was primarily due to the US$138.5m NGP Rubicon GSA Pool (WBCMT 2005-C20 and WBCMT 2005-C21) re-entering Fitch's delinquency index.

The previously executed forbearance agreement, which allowed the borrower additional time to market and sell the 10 properties, expired on 29 February. Only one industrial property located in New Jersey was sold and released during the forbearance period. The special servicer is consequently preparing to file receiverships in the various states of the remaining properties in the portfolio and the borrower is said to be cooperating with that effort.

Other noteworthy delinquencies include the US$27.1m States Addition Apartments loan (WFRBS 2014-C22) - which is secured by a 235-unit multifamily property in Dickinson, North Dakota - that became 60-days delinquent in February (see SCI's CMBS loan events database). Meanwhile, the remaining asset in the WBCMT 2007-WHALE8 transaction - the US$58.4m Four Seasons Nevis (consisting of a US$51m A-note and a US$7.4m B-note) - was finally resolved, with the A-note taking a 62% loss and the B-note taking a full loss.

Finally, the US$133.5m Triangle Town Center loan (LBUBS 2006-C1 and LBUBS 2006-C7) was modified: the loan was extended for three years to December 2018, with two additional one-year extension options if certain DSCR and pay-down thresholds are met; and the interest rate was reduced during the initial three-year extension period to 4%. In exchange, the borrower contributed US$25m of new equity to fund tenant improvements, leasing commissions and capital expenditures.

CMBS

Euro maturity defaults dip

The 12-month rolling loan maturity default rate for the European CMBS in S&P's rated universe increased slightly to 10.3% from 10% at end-February. Overall, the senior loan delinquency rate decreased to 46.5% from 47.8%, however.

The delinquency rate for continental European senior loans decreased to 58.8% from 59.8% during the month. But the rate for UK loans increased slightly to 22.4% from 22%.

Insurance-linked securities

UK ILS commitment reiterated

In its 2016 Budget announcement yesterday, the UK Government reinforced its commitment to establishing a fully functioning ILS market within the country. The government says it is consulting on proposals for a new, competitive framework for the asset class, which would entail the supervision, corporate structure and taxation of ILS vehicles.

The proposals for an ILS framework are presented in the Bank of England and Financial Services Bill, which is currently before Parliament. The bill contains a power to make regulations that would facilitate ILS business.

"Finance Bill 2016 will include a power to make regulations for the tax treatment of ILS at the level of issuers and the investor," the Budget announcement says. "The government will then consult on new regulations, which will be finalised by the end of 2016."

The latest announcement follows a number of recent key developments that have signalled the intent of UK authorities to establish the country as the latest hub for ILS. HM Treasury earlier this month opened consultation on proposals for a regulatory and tax framework (SCI 2 March), which stressed the need to match tax levels seen in other ILS domiciles.

The London Market Group has also been actively involved in consultation and established an industry task force last year with the mandate for advising the government on issues surrounding the development of a market (SCI 9 June 2015). The momentum stems from the 2015 Budget announcement, where Chancellor George Osborne originally outlined the government's commitment to forming a viable framework (SCI 19 March 2015).

Risk Management

US CCP regime 'equivalent'

The European Commission has approved the US CFTC's regulatory regime for central counterparties as equivalent to that of the European Union's. The announcement comes after an agreement was reached last month for a common approach that would enable an easier transatlantic working environment for both US and European CCPs (SCI 11 February).

The decision provides a single set of rules that enables respective counterparties to work at a similar standard, while alleviating the regulatory burden for both. The agreement was also made in the hope of encouraging cross-border activity.

"It means that US CCPs, once recognised by ESMA, can continue to provide services to EU companies," says European Commissioner Jonathan Hill. "We look forward to the CFTC's forthcoming decision on substituted compliance which will allow European CCPs to do business in the United States more easily".

The announcement outlines that CCPs registered with the CFTC will be able to obtain recognition in the EU. Market participants will be able to use them to clear standardised OTC derivative trades as required by EU legislation, while the CCPs will remain subject solely to the regulation and supervision of their home jurisdictions.

CCPs that have been recognised under the EMIR assessment process will also be recognised as a qualifying CCP across the EU under the CRR. This means that EU banks' exposures to these CCPs will be subject to a lower risk weight in calculating their regulatory capital.

A CCP wishing to obtain recognition must apply to the ESMA. Under the regulatory body's decision, US CCPs seeking recognition in the EU will need to confirm that their internal rules and procedures meet certain conditions set out in the decision relating to the calculation of initial margins and the default fund.

Although rules may differ in the detail, the announcement also says that international regulators are pursuing the same objectives by promoting the use of CCPs subject to robust prudential requirements. Through the use of deference, as agreed by the G20, regulatory gaps, duplication, conflicts and inconsistencies which can lead to regulatory arbitrage and market fragmentation are limited.

Risk Management

Pillar 3 updates proposed

The Basel Committee has opened a consultation on new proposals regarding its Pillar 3 disclosure requirements. The proposals include a draft disclosure requirement of hypothetical risk weighted assets that are calculated on the basis of the Basel framework's standardised approaches.

In addition, they include a 'dashboard' of key metrics and enhanced granularity for the disclosure of prudent valuation adjustments. There are also further proposals for incorporating additions to the framework to reflect ongoing reforms, including the total loss absorbing capacity regime, the proposed operational risk framework and the final standard for market risk.

The Committee's proposal would also consolidate all existing Pillar 3 disclosure requirements of the Basel framework, including the leverage ratio and liquidity ratios disclosure templates. The new proposals would combine with the revised Pillar 3 requirements issued last year (SCI 29 January 2015) to comprise a single framework.

Comments on the proposals are invited by 10 June.

Risk Management

Fed outlines SCCL proposals

The US Federal Reserve has set out proposals establishing single counterparty credit limits (SCCL) for domestic and foreign bank holding companies with US$50bn or more in assets. The rules are intended to implement the requirements in Section 165(e) of the Dodd-Frank Act and to reduce the number of risks that might arise from such companies' exposure to unaffiliated companies that could potentially fail.

Section 165(e) caps the credit exposure of such covered companies at 25% of its capital, or at a lower amount set by the Fed. A Cadwalader client memo notes that the SCCL is similar conceptually to the lending limit that has applied to state and national banks for a long time.

However, some key differences include how the SCCL is calculated on an aggregate basis across an entire organisation and not just the bank. This creates a much wider net than the older lending limit and will require an 'enterprise-wide' approach to credit exposure management.

The SCCL also adopts a more fluid concept of counterparty, effectively expanding the definition in line with credit exposure increases. The SCCL also adopts three different ceilings depending on the size of the covered company and the nature of the counterparty. This is in contrast to the uniform ceiling set for all banks with the bank lending limit.

In addition, while the bank-lending limit caps the amount of total credit with sub-limits for secured and unsecured credit, the SCCL is calculated based on aggregate net credit exposure. This means that collateral, credit enhancements or guarantees will free up capacity for additional credit exposure under the SCCL. However, only very limited types of collateral, credit enhancements or guarantees qualify under the SCCL.

The Fed invites feedback on its proposals by 3 June.

Risk Management

CFTC approves CCP framework

The CFTC has approved a compliance framework for dual registered central counterparties located in the European Union, further facilitating derivatives trading across the Atlantic. The European Commission has also approved the US regime (SCI 16 March).

The CFTC's move permits EU CCPs already registered with the US body to become dually-registered derivative clearing organisations (DCOs). The move provides the intended harmonisation of regulation on derivative OTC clearing between the US and the EU.

Simultaneously, the CFTC's Division of Clearing and Risk issued a no-action letter that outlines the limited relief for DCO/CCPs in relation to their non-US clearing activities and the CFTC's regulations.

RMBS

Aussie arrears push up

The 30-plus day delinquency rate for Australian prime RMBS increased in from 1.14% in 3Q15 to 1.29% in 4Q15, according to Moody's latest index results for the sector. The increase reflected higher spending levels in the run-up to the holiday season.

Moody's says that the rise was driven by the performance of prime RMBS issued by major banks, as well as non-authorised deposit-taking institutions. Meanwhile, the arrears of RMBS deals comprising 100% low-documentation loans also increased, with the 30-plus day delinquency rate rising to 4.08% in 4Q15 from 3.43% the previous quarter.

The total repayment rate for prime RMBS was at 24.08% at the end of 2015, lower than the 25.47% averaged throughout the year. There was also an uptick in 30-plus day delinquencies for Australian non-conforming RMBS, with the rate increasing to 4.22% at the end of December from 3.49% at end-September.

Looking into 2016, Moody's expects Australian prime RMBS delinquencies and defaults to increase slightly. However, losses will likely stay low due to the buildup in home equity and deleveraging.

Home prices across Australia's major cities rose by 7.81% year-on-year at the end of 2015. Sydney and Melbourne registered the strongest increases of 11.47% and 11.19% respectively.

RMBS

HPF reaping RMBS emergence

S&P says that China's turn towards securitisation has supported economic and financial initiatives from alternative financiers, such as The Housing Provident Fund (HPF). HPF helps low to middle income households by extending cheaper home loans.

"Six HPF centres issued RMBS or home loan associated rights in 2015," says S&P credit analyst Jerry Fang. "We expect more HPF-sponsored RMBS to come to market in 2016, thanks to the matched funding that securitisation could provide and because authorities have encouraged municipal HPF centres to use securitisation to alleviate funding pressure and increase their lending capacity."

Outstanding HPF-originated home loans amounted to about CNY2.55trn as of end-2014, according to a previous report by the Ministry of Housing and Urban-Rural Development, Ministry of Finance and the People's Bank of China. The report also says that HPF centres disbursed roughly 2.2 million loans during 2014, with about CNY381bn added to the HPF's loan balance during 2014.

However, HPF's funding sources are limited, relying mainly on employers' and workers' mandatory monthly contributions - which flow in slowly - to finance the origination of home loans. Meanwhile, fund outflow needs - such as providing loans and paying mandatory returns to individual contributors - can arise suddenly, constraining HPF liquidity and lending capacity.

Therefore, the use of securitisation as an alternative source of funding has been promoted by regulators, which are in the process of finalising their revisions to rules on HPF management. A draft version was released in November 2015 that incorporates the use of securitisation by HPF centres. Full-scale securitisation will be allowed for all municipal HPF centres when the revised regulation comes into effect.

S&P warns that credit risk on mortgages may be more pronounced in RMBS originated by HPF centres than those by other financiers, given the HPF's policy to support economically weaker borrowers. The agency suggests that the primary weaknesses are lower asset yields and high geographical concentration in certain municipal areas.

Two prime examples are Hu HPF RMBS 2015-1 and Hu HPF RMBS 2015-2, where the portfolios have low mortgage rates, lower current LTV ratios and lower annual incomes. They also have a higher geographic concentration in Shaghai and a lower percentage of newly constructed properties as collateral than bank-originated RMBS. However, the agency says it has seen higher overcollateralisation in some transactions as a way to address these issues and they should not deter further deals hitting the market this year.