Contents

Structured Finance

Land of the few

Marketplace ABS 'a long way away' for Europe

Marketplace lending ABS is providing a new source of yield for investors - although, as a new and largely untested asset class, concerns remain. Activity in a number of jurisdictions is starting to grow, but securitisation is expected to remain largely confined to the US for the foreseeable future.

"The US has the most developed marketplace lending market. China is very large, but lacks transparency, so the UK market is probably the next most significant market after the US. Europe and Australia are developing, but are still behind the UK," says Harsh Patel, principal, Victory Park Capital Advisors.

Marketplace lenders have filled the space left behind by banks as those institutions became more selective in their lending, which reduced funding to several asset classes. "That situation was not healthy, so the market has evolved to include challenger banks and marketplace lenders and that is a very healthy change," says Simon Champ, ceo, Eaglewood Europe.

In a somewhat unexpected sense, the financial crisis was exactly what marketplace lending needed. Not only did it cut bank lending, but it also came at a time when technological advancements were sufficient to support online marketplace businesses.

"Before the crisis, the banks were getting involved in every line of business that they could. But as the crisis and the regulatory response to it forced the banks to pull back, marketplace lenders were able to fill the space they left behind. That could only happen because the technology was also finally there," says Gyan Sinha, cio, Godolphin Capital Management.

While marketplace lenders began by lightly stepping on banks' toes, they now appear to be almost wearing the banks' shoes. As marketplace lenders take on more and more banking functions, the distinction between the institution types is diminishing.

"Lenders see themselves as brokers, but they are also underwriting credit. It is one thing to simply act as an introductory service, but underwriting and using proprietary credit scoring technology turns the business into something very different," says Ian Robinson, co-head, 400 Capital Management Europe.

The industry has moved away from peers lending to peers and is now dominated by large platforms backed by millions of dollars. However, so long as lenders are not taking deposits and are just providing a platform for loans, they remain different.

With so many different approaches in operation, it is perhaps unsurprising that standardisation is one of the items at the top of investors' wish lists. This applies both to documentation and credit underwriting.

"As platforms gain more market share, standardisation is bound to occur, especially in the consumer loan space. However, we think it is more challenging to create underwriting standardisation for SME loans," says Champ.

"It will be hard to rate marketplace lending deals if the loans are all coming from a variety of different sources. Ideally, a rating agency would want to see a track record of a few years, but currently platforms would struggle to show you six months," says Krishna Prasad, principal, Syzygy Advisors.

One way in which standardisation can be brought closer is through consolidation. This has already started in the space, such as with Funding Circle's purchase of Zencap in Germany (SCI 9 December 2015).

All new markets have early wrinkles to be ironed out. While there is uncertainty, there is also opportunity and portfolio construction becomes very important.

ABS spreads continue to widen, despite European fundamentals not appearing to support such widening. A key strength of marketplace platforms is that they offer exposure to just the fundamentals, rather than being mark-to-market. Choosing the right platforms largely comes down to the experience of their underwriting teams.

"We start by choosing sectors and then identifying the best practitioners within those sectors. For that reason, our ideal portfolio would probably be quite concentrated," says Sinha. "One sector we are optimistic about is consumer, which we think will perform well in the next five to 10 years."

UK SME exposure, under-served by the banks, is another popular sector. However, it seems to require more structuring and to have less standardised data.

Sinha says he is fairly agnostic on whether a deal consists of consumer or SME loans. He notes: "What really matters is that we are strongly averse to paying above par because, as soon as you do, the risk changes fundamentally."

Choosing the right names is all the more important because the secondary market for marketplace loans is so limited. Champ says: "There is no significant secondary market, so you have to buy loans with the assumption that you will hold them until maturity."

Doing so, of course, creates liquidity issues. Should an investor ask a manager for their money back, then that manager cannot simply sell off some loans. Securitisation could be one way to reduce leverage, but it does not seem a realistic proposition outside of the US at present.

"We are a long way away from securitising marketplace loans in Europe. There are simply too many obstacles, not least ratings. I am also not convinced that the economics would work," says Prasad.

Robinson notes that the short WAL of the loans is also a major obstacle to securitisation. "However, consolidation could create a large enough portfolio for the economics to work. You need a steady state book for the cost to be worthwhile," he says.

JL

Secondary markets

Euro CLO stutter

The rally in the European CLO secondary market looks to have stuttered a little over the past couple of sessions.

In line with European securitisation secondary in general, which in turn has been in step with broader markets, the end of last week and the start of this have been fairly quiet in European CLOs. However, after the boom in activity and the rally in spreads across the board throughout the bulk of last week the slowdown in the sector is all the more noticeable.

As with other areas recently, CLO liquidity has been relatively thin, with flows light and focus shifted towards BWICs. There, yesterday's CLOs lists saw a very high proportion of DNTs for the first time in a while. Nevertheless, tone remains positive and secondary spreads were unchanged on the day throughout the stack.

There are three CLO BWICs on the European schedule for today so far. The largest is a five line €18.05m 1.0 triple-B auction due at 13:00 London time.

The list consists of: GSCP II-X D1, HARVT III-X D2, HARVT II-X D2, JUBIL VII-X D and REGP 1X D. None of the bonds has covered with a price on PriceABS in the past three months.

Secondary markets

US CLOs come back

The US CLO secondary market's recent return to form is gaining a firmer footing.

"We're definitely seeing a bid in the market across the capital structure and after trading down so far it's really coming back," says one trader. "From our side we're looking for double- and triple-As and they're proving very difficult to find."

However, the trader adds that the bulk of focus remains in the mezz space. Consequently, he highlights two BWICs due today from lower down the stack.

"At 10:00 there is a double-B list with more distressed bonds - MVOCs are all below 100 - and we're yet to see much talk on it, so it'll be interesting to see where it trades," the trader says. "Whereas at 11:00 there is a less distressed list - MVOCs even for the single-Bs are over 100 - and talk for it is tighter than recent levels."

Despite improving tone across the market there is still an element of price discovery driving secondary supply, the trader notes. "The people putting out those two lists are still really trying to see how deep the mezz rally is and also, of course, to assess current clearing levels for good versus less good bonds."

Overall, there are currently five BWICs on the US CLO schedule for today, but the largest are the above-mentioned two mezz lists. The 10:00 New York time six line $28.225m auction comprised: HLA 2013-1A D, KVK 2013-1A E, MHAWK 2014-3A E, WOODS 2013-10X E, WSTC 2013-1A D and WSTC 2013-1X D. Only KVK 2013-1A E has covered on PriceABS in the past three months - at H50S on 11 March.

The 11:00 list combines mezz and equity across 34 line items totalling $66m. It consists of: BLUEM 2013-4A E, BOWPK 2014-1A F, BSP 2015-VIIX D, CIFC 2012-2A SUB, CIFC 2013-1A SUB, CIFC 2013-3X SUB, CIFC 2014-1A E, CIFC 2014-2A B2L, CIFC 2014-5A E1, CIFC 2014-5A F, CIFC 2014-5X F, CIFC 2015-1A E1, CIFC 2015-1X E1, CIFC 2015-2X E, CIFC 2015-2X SUB, CIFC 2015-3X E, CIFC 2015-3X INC, CIFC 2015-4A D, CIFC 2015-4X D, CIFC 2015-4X SUB, CIFC 2015-5A D, CIFC 2015-5X SUB, DRSLF 2015-41A E, DRSLF 2015-41A F, GARR 2015-1X D, JEFFM 2015-1X E, NZCG 2015-2A D, SHACK 2015-8A E, SNDPT 2014-3A E, SNDPT 2014-3X E, SNDPT 2015-2X F, SNDPT 2015-3A E, WINDR 2015-2A E and YCLO 2015-1A E.

Only two of the bonds have covered with a price on PriceABS in the past three months - BOWPK 2014-1A F at 72H on 17 March and CIFC 2014-1A E at 67H on 22 January.

Secondary markets

Euro secondary steady

Activity in the European securitisation secondary market is steady rather than spectacular at present.

Liquidity grows ever thinner as the long holiday weekend approaches and light, patchy flows continue to characterise the market. Yesterday's BWICs traded reasonably well for the most part, though the ABS/MBS lists yielded little colour. For now at least spreads across the board remain stable despite geopolitical concerns.

There is currently one BWIC on today's European schedule. Due at 15:00 London time it involves two lines of CLO triple-Bs - €3m BLACK 2015-1X D and €1.5m CGMSE 2015-3X C. Neither bond has ever covered with a price on PriceABS.

Secondary markets

US CLO surge

There is a surge in US CLO secondary supply today.

Sellers appear to be looking to capitalise on the continuing mezz bid on the last full trading day ahead of the long weekend with a considerably larger number of auctions than in recent sessions. The move follows most of yesterday's lists trading reasonably well with the exception of the large mezz and equity mix that saw a high proportion of DNTs, but even there the seller released covers evidencing the strong interest in the middle of the stack.

21 of the 27 single- and double-B line items on yesterday's auction did not trade. They covered as follows: BLUEM 2013-4A E at 82.76; BSP 2015-VIIX D at 78.88; CIFC 2014-1A E at 73; CIFC 2014-2A B2L at 73.25; CIFC 2014-5A E1 at 81.16; CIFC 2014-5A F at 63.53; CIFC 2014-5X F at 63.53; CIFC 2015-1A E1 at 76.91; CIFC 2015-1X E1 at 76.91; CIFC 2015-2X E at 79.88; CIFC 2015-3X E at 83.5; CIFC 2015-5A D at 85.88; GARR 2015-1X D at 73.14; NZCG 2015-2A D at 80; SHACK 2015-8A E at 76.01; SNDPT 2014-3A E at 76.7; SNDPT 2014-3X E at 76.12; SNDPT 2015-2X F at 63.01; SNDPT 2015-3A E at 80.1; WINDR 2015-2A E at 80.01; and YCLO 2015-1A E at 82.11.

Today, there are currently 13 BWICs on the US CLO calendar. Of those, nine involve 2.0 mezz paper to a greater or lesser extent, with the chunkiest being a collection of double-Bs due at 11:00 New York time.

The $21.05m four line list consists of: BALLY 2013-1A E, OCP 2014-5A D, REGT3 2014-1A D and VENTR 2014-19A E. Only REGT3 2014-1A D has covered with a price on PriceABS in the past three months - at 57.31 on 3 February.

Away from mezz, the largest list today is currently a ten line $74.3+m current face collection of 1.0 seniors due at 10:30 comprising: APID 2007-5A A1S, CALD 6A A2, CARL 2007-10A A2A, DRYD 2006-11X A2A, EATON 2006-8X B, HLCNL 2006-1A A1A, LROCK 2007-1A A3A, MDPK 2006-2A A2A, STCLO 2006-5A A2AI and VERI 2006-2A A1T. Only APID 2007-5A A1S has covered with a price on PriceABS in the past three months - at 98H on 23 February.

Structured Finance

SCI Start the Week - 21 March

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

Pipeline
The pipeline was dominated by auto-related ABS entrants last week. A couple of CMBS and RMBS a piece were also marketing, as well as an aircraft ABS and a marketplace lending ABS.

The auto ABS comprise: US$300m Avis Budget Rental Car Funding Series 2016-1, US$600m Chesapeake Funding II series 2016-1, E-CARAT 6, US$750m Ford Credit Floorplan Master Owner Trust A Series 2016-2, Hyundai Auto Receivables Trust 2016-A and CNY2.374bn Silver Arrow China 2016-1. The US$510m Apollo Aviation Securitization Equity Trust 2016-1 and US$278.4m Citi Held for Asset Issuance 2016-PM1 deals rounded out the ABS announced last week.

The CMBS entrants consist of US$1.15bn CGGS 2016-RND and US$712m WFCMT 2016-C33, while the RMBS were US$1.89bn Chase Mortgage Trust 2016-1 and US$772.75m Towd Point Mortgage Trust 2016-1.

Pricings
Auto-related ABS also accounted for the lion's share of new issuance last week. Several consumer and esoteric ABS also priced, as well as a number of CLOs, CMBS and RMBS.

The auto prints were US$902m Ford Credit Auto Lease Trust 2016-A, US$122.9m OSCAR US 2016-1, US$312.08m Prestige Auto Receivables Trust 2016-1 and US$840.8m World Omni Auto Receivables Trust 2016-A. A couple of retained deals - €780m FT Santander Consumer Spain Auto 2016-1 and €551m RevoCar 2016 - also closed.

The esoteric ABS consisted of US$130.5m BXG Receivables Note Trust 2016-1, US$422.84m Element Rail Leasing II 2016-1 and US$425m Sierra Timeshare 2016-1. US$733.49m OneMain Financial Issuance Trust 2016-2 and US$750m Synchrony Credit Card Master Trust Series 2016-1 made up the remaining ABS pricings.

Meanwhile, US$405.48m ACAS CLO 2016-1, US$402.9m Carlyle Global Markets Strategies CLO 2016-1, €411m CVC Cordatus Loan Fund VI and US$500m Octagon Investment Partners 26 accounted for the CLO prints. US$1.1bn FREMF 2016-K53 and €317m Taurus 2016-1 DEU were the CMBS new issues, while A$871m IDOL 2016-1 and £475m Offa 1 were the RMBS.

Editor's picks
Final curtain?: 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...
ABS bound: KPMG and Cambridge University's alternative finance centre both agree that securitisation will play a vital role in the continuing growth of marketplace lending. The bodies recently partnered on a report that highlights the growth seen to date in marketplace lending in the UK and Europe...
Euro secondary partly pauses: The bulk of the European securitisation secondary market took a pause yesterday, but CLOs continue to outperform...

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

Regulatory update
• 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.
• In its 2016 Budget announcement last week, 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 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.
• The US CFTC has approved a compliance framework for dual registered central counterparties located in the EU, further facilitating derivatives trading across the Atlantic. The European Commission has also approved the US regime as equivalent to that of the EU'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).

CMBS

CMBS TRS index introduced

Markit and Trepp have launched a new total return swap index referencing US last cashflow triple-A rated CMBS bonds issued in the previous 12 months. Dubbed the Markit iBoxx Trepp CMBS TRS Index, the underlying index for the contract is the Markit iBoxx Trepp CMBS Original AAA Rolling Index.

Markit will be the index administrator and calculation agent for the new index, while Trepp will provide pricing and reference data. Eligibility criteria for the index include: conduit deals with a balance of over US$500m, bond balances of over US$100m and WALs of eight years. At launch, the index comprises 57 different CUSIPs, with the TRS scheduled to settle quarterly.

Deutsche Bank CMBS analysts point to the introduction of an independent pricing source as one benefit of the new index. "In earlier versions of CMBS total return swaps, investors relied on dealer prices for settlement. Because many dealers were short risk to hedge loans (TRS payer), some investors (TRS receiver) did not like that aspect of the instrument," they explain.

Another benefit is the lower basis risk to cash bonds versus the CMBX index. "In the past six months, CMBX has not tracked new issue spreads well. Investors also will typically prefer a lower basis to cash bonds, since cash bond performance is their benchmark," the Deutsche Bank analysts add.

Each CMBX series is launched in January and references 25 deals priced in the last calendar year. In contrast, the Markit iBoxx Trepp CMBS TRS Index is dynamic and updated once a month, so is more reflective of on-the-run new issue CMBS.

However, the new index is duration-sensitive, according to the analysts. "The TRS is a total return index and includes returns from interest rate movements. In the past, dealers have managed interest rate risk and credit spread risk separately, so this index would require them to change that approach. Dealers would separately have to manage exposure to subordinate CMBS spread movements (which they must also do separately in CMBX)."

CS

RMBS

Modification behaviour gauged

One in every three US mortgages liquidated today has been modified at least once, so deciphering whether a servicer will pursue an additional modification in lieu of liquidation can help determine the timing of RMBS cashflows and write-downs. In a new study, Morgan Stanley RMBS strategists examine a number of factors that could cause a servicer to lean one way or the other.

While there isn't a golden rule regarding whether to remodify a loan or foreclose, there appear to be a number of amber guidelines. The Morgan Stanley analysis highlights four such guidelines.

First, a re-defaulted modification in a judicial state is more likely to be remodified than one in a non-judicial state. On the other hand, non-judicial re-defaults appear more likely to be liquidated, due to their shorter foreclosure timelines.

The necessity of going through the courts in judicial states has long been the cause of lower liquidation rates and higher loss severities in the residential credit space. These timelines and the expenses that come with them appear to be a factor in servicers' decisions as to whether to remodify a mortgage, the strategists suggest.

Second, characteristics of the first modification are important. For example, prior modifications that left the mortgage with an underwater MTMLTV or modifications performed on borrowers delinquent for six months or less appear slightly more likely to be remodified upon default.

"Not only are borrowers with lower post-modification MTMLTVs less likely to re-default, they are also more likely to prepay. Looking at the outcomes for those mortgages that did re-default, the general rule of thumb appears to be that the higher a mortgage's MTMLTV is after the first modification, the more likely that the borrower is to be offered a remodification," the strategists observe.

Mortgages with a short period of delinquency also appear more likely to be liquidated upon re-default. Additionally, re-defaulted principal modifications realise substantially lower loss severities upon liquidation than rate and term mods or never modified loans.

Third, performance of the first modification matters. Borrowers that make a good faith effort to perform on their first modification and ultimately make more than one year's worth of payments before re-defaulting are more likely to receive a second modification than those who miss payments in the first 12 months after modification.

Finally, non-bank servicers appear more likely to offer a borrower a second modification, while bank servicers demonstrate a slightly higher propensity to take a mortgage through foreclosure upon re-default.

The strategists note that for investors with enough structural enhancement to benefit from recovery cashflows today, re-defaulting modifications in non-judicial states serviced by banks provide the highest-probability route to liquidation. Combining these characteristics with modifications that leave the borrower with a lower MTMLTV or borrowers that performed on their modification for less than a year before re-defaulting further reduces the chances that a mortgage will be remodified.

"At the other end of the spectrum, for investors looking to reduce the risk of loss in the near term by eschewing liquidation in favour of remodification, re-defaults in the hands of non-bank servicers - especially those located in judicial states, with a borrower who managed to stay current on their previous modification for more than a year - appear to be the way to go," the strategists conclude.

CS

Structured Finance

Data heavyweights merge

IHS and Markit have agreed to a US$13bn merger, combining their information, analytics and solutions services into a single company. The completion of the merger will see the company renamed IHS Markit, which will be headquartered in London but have certain key operations in Englewood, Colorado.

Details of the deal reveal that IHS shareholders will own approximately 57% of the shares, with Markit shareholders taking the remaining 43%. IHS shareholders will receive approximately 3.556 common shares of IHS Markit for each share of IHS common stock. Based upon the IHS closing price of US$110.71 on 18 March, this implies a per share price of Markit common shares of US$31.13.

Combined, the two companies reported US$3.3bn in revenue for the 2015 fiscal year. They also generated US$1.2bn in adjusted earnings before interest, taxes depreciation and amortisation, and US$800m in free cashflow.

The new company will seek to exert a strong balance sheet by having a capital policy with a target leverage ratio of two to three times. IHS Markit will execute US$1bn of share repurchases in each of 2017 and 2018.

In addition, the company anticipates an approximate US$100m of run rate revenue opportunities by fiscal year 2019. According to projections, IHS Markit's subscription-based model will generate approximately 85% in recurring revenues.

Jerre Stead, IHS chairman and ceo, will assume this same role for IHS Markit. Markit's chairman and ceo, Lance Uggla, will serve as president and a member of the board. He will assume Stead's role upon his retirement on 31 December 2017. The board in total will comprise 11 members, six of which will come from IHS and five from Markit.

The transaction is expected to close in 2H16, subject to customary approvals. Weil, Gotshal & Manges is providing legal advice to IHS on the deal. IHS' lead financial advisor is M Klein and Company, with Goldman Sachs also providing advice.

Markit's legal advisor is Davis Polk & Wardwell and its financial advisor is JPMorgan.

Structured Finance

Law firm poaches bank md

Richards Kibbe & Orbe has recruited Vincent Basulto to join its New York office as a partner in its corporate department. He leaves his role as md of Macquarie Group's credit markets division and general counsel for one of the bank's investment advisors.

Basulto's practice will focus on structured finance, debt transactions, marketplace lending, derivatives and other transaction work in connection with complex financial products. He will work beyond just oversight of credit products and be involved in the representation of both dealer and proprietary trading desks.

Structured Finance

Credit Suisse exits European ABS

Credit Suisse is pulling the plug on its European ABS presence as it revealed new details on its global restructuring plans. The bank confirmed that it will end operations in European securitised product trading, along with distressed credit and long-term illiquid funding.

Capital allocation will also be reduced in a number of other areas, which it describes as 'not consistent' with its new strategy. Credit Suisse has been cutting its legacy exposures in recent months, with the bank revealing that its US CLO positions have been substantially cut from US$800m to US$300m. The bank has reportedly taken big mark-to-market losses as oil and gas loans in the US CLO space have experienced dramatic price drops.

Gross write-downs regarding Credit Suisse's US CLO operations have accumulated to US$64m to date. Combined with distressed credit, the bank says its quarterly revenues are expected to be down by 40% to 45% compared to 1Q15.

As part of the move to become less capital intensive, the cut-backs will also see the bank reduce its headcount by 2,000. It says that this will reduce its global markets cost base from US$6.6bn to US$5.4bn by end-2018.

Structured Finance

Credit products group acquired

Cowen and Company is set to acquire CRT Capital Group's credit products, credit research, special situations and emerging markets units. The acquired business will be named Cowen Credit Research and Trading and CRT will use the proceeds to invest further in its equities, banking and rates businesses.

CRT's credit products unit includes the sales and trading of distressed debt, private placements and trade claims. The credit research unit focuses on distressed and special situations coverage and cross-capital structure. The special situations group includes the sales and trading of event-driven, post-reorganisation equities, spins and other special situations.

The acquisition aligns with Cowen's approach to entering businesses that are highly relevant in the current market environment, complement the company's current businesses and enhance overall margins. Financial terms of the transaction are undisclosed, but it is expected to complete in 2Q16.

CDO

CDO assignments affirmed

Moody's has determined that the deemed assignment of the collateral management agreements for Altius III Funding, Citius I Funding and Fortius I Funding - as a result of a change in ownership control of the manager's parent - will not result in any adverse action on the ratings of the notes. The ABS CDOs are currently managed by Cairn Capital North America.

The deemed assignment does not alter the responsibilities, duties and obligations of Cairn as collateral manager under the CMA. Moreover, no changes are currently planned to the collateral management team at Cairn, as a result of the deemed assignment.

Mediobanca acquired a majority interest (51%) in Cairn Capital Group last August. The majority of the stock was purchased from Cairn Capital's institutional shareholders, following which RBS had no remaining interest in the firm. Under the agreement, Mediobanca has the option to acquire some or all of the remaining 49%, the majority of which is held by the management and staff of Cairn Capital.

Under ceo Paul Campbell, Cairn Capital management continues to be responsible for day-to-day operations and retains full autonomy over its investment processes.

CDS

CDS trading head replaced

Basil Eggenschwyler is set to take over high yield cash bond and CDS trading for Credit Suisse. Eggenschwyler, who is already in charge of trading high yield credit derivatives, also previously traded CDS at Barclays. He will replace Matthew Courey in mid-April, who will leave to continue his role as chairman of Seeds of Peace, as well as exploring other options.

CLOs

Hildene ends CLO presence

Hildene Leveraged Credit (HLC) has sold the management contracts of four US CLOs to an affiliate of Fortress Investment Group. The sale, which totals US$1.4bn in assets, signals HLC's exit from the CLO business. The CLOs will now be managed by the Fortress-affiliated group.

Terms of the agreement were not disclosed. Ted Gooden of Berkshire Capital served as financial advisor to Hildene on the sale.

Insurance-linked securities

Kane sells ILS business

Artex Risk Solutions is set to acquire Kane's insurance management operations (KIM), with the deal expected to close by the end of the month. Artex says that the acquisition will strengthen its ILS capability in Cayman and Bermuda.

KIM specialises in insurance and alternative risk solutions with expertise in the healthcare, insurance, financial services, transportation and construction industries. It specifically provides services related to ILS and structured transaction administration, including catastrophe bonds, sidecars and collateralised reinsurance. Its operations will continue to be run by those already positioned in the firm and will maintain its locations in Bermuda, Cayman and Guernsey, as well as South Carolina and Vermont in the US.

Artex's operations in Bermuda and Cayman will combine into Kane's under the respective leadership of Rob Eastham and Linda Haddleton. Together with Kane's Guernsey team, they will report to Nick Heys, ceo of Artex International. Kane's US operations will merge into Artex's US business under the leadership of Jennifer Gallagher, president of Artex North America.

"Combining these resources with the power of Artex's distribution network is expected to drive exponential growth in each of the domiciles represented," says David McManus, president and ceo of Artex. "We will have more than 1,400 customers, served through over 900 risk-bearing entities in 27 domiciles and 370 employees, providing our clients and business referral networks with substantially greater scale and resource breadth."

RMBS

Mortgage lender names leader

Venn Partners has named Marc de Moor as head of Venn Hypotheken (SCI 10 March). Based in Breda, he has over 30 years of experience in residential mortgages, social housing funding, retail banking and insurance. He previously built a Dutch residential mortgage business for Argenta, including a €15bn residential mortgage portfolio and a €2.5bn savings and complementary life insurance business.

Venn Hypotheken plans to market its products through well-developed financial intermediary networks in the Netherlands, which are responsible for around 60%-70% of new mortgage lending. It will finance its loans through a range of long-term financing solutions, including RMBS, fund products and direct investment, with the majority of its funding expected to come from insurance companies and pension funds. The lender's access to these markets will be supported by Venn Partners in London, including its managing partner Gary McKenzie-Smith.

Dutch mortgage rates remain higher than other comparable mortgage markets, following the withdrawal of several international lenders and increased regulation of bank lending. Around 70% of new origination is currently provided by domestic banks, but this is expected to fall closer to 50% in the coming years, with the resulting market share going to more competitively priced non-bank lenders.

ABS

For-profit loan exposure eyed

A pair of recent private student loan ABS - Navient Private Education Loan Trust 2015-B and 2016-A - include high concentrations of collateral tied to a single for-profit institution, according to Moody's. The agency says such exposure is credit negative for the transactions, due to the very high default rates of for-profit loans and the regulatory scrutiny facing for-profit institutions.

The higher credit risk associated with borrowers attending for-profit institutions is attributable to a number of factors, including low programme completion and graduation rates or low incomes relative to the borrower's cost of attendance. If a private student loan ABS transaction contains a large share of borrowers currently attending a single for-profit institution under government investigation, the fall-out from the single occurrence of a rare event - such as school closure - could lead to a sharp increase in defaults in the transaction.

However, including highly seasoned loans in the pool mitigates both event and default risks, while higher credit enhancement - as seen in NAVI 2015-B and 2016-A - allows rated notes to withstand the higher net loss expectations resulting from exposure to riskier collateral. The two deals carried senior overcollateralisation at closing of 41.7% and 35.9% respectively, compared with 32% percent and 29.5% for the two prior Navient transactions. The NAVI 2016-A loan pool, for instance, was also on average 51 months in repayment as of the 8 November 2015 statistical cut-off date.

In both NAVI 2015-B and 2016-A, the concentration of for-profit schools is roughly four times the past five-year average for private student loan transactions sponsored by Navient. Former students at Career Education Corporation (CEC), a for-profit institution, accounted for more than a quarter of the underlying pool of borrowers in NAVI 2016-A. NAVI 2015-B also had a large exposure to a single for-profit institution.

CEC loans - which were originated mostly under Navient's Signature programme - have historically performed significantly worse than other Signature loans, which include a combination of both for-profit and not-for-profit schools. CEC is currently under investigation by various agencies, including the Federal Trade Commission, which is seeking to determine whether the company was involved in deceptive or unfair practices in the marketing and advertising of educational accreditation services.

Recently, such investigations have led to school closures or settlements involving private student loan forgiveness. However, given the narrow set of circumstances around which private student loan forgiveness has been granted, Moody's views widespread private loan forgiveness on securitisations as unlikely.

Private student loan ABS transactions typically have low single-digit exposure to any one institution. Deals backed by high-quality refinancing loans that certain new lenders underwrite are the exception though. Such concentrations usually relate to borrowers from schools with strong reputations, which minimises the risk of potential school closure, the agency notes.

Structured Finance

Dutch covereds outstrip placed ABS

A new study published by the Dutch central bank, DNB, shows that banks in the Netherlands had more covered bonds outstanding (at €61bn) than non-retained RMBS (€55bn) at end-2015. Further, non-retained securitisation volume has dropped from €94bn in 2007 to €55bn. In contrast, while covered bond supply has also declined, the amount of covered bonds outstanding has remained roughly stable.

The total amount outstanding in Dutch placed securitisations fell by 22% to €58bn last year, with external investors purchasing just €5.5bn in new issuance, which is almost 50% down on 2014's volume and the lowest level seen since 2009. RMBS accounted for €5.1bn of placed issuance last year, a 45% drop from 2014.

The DNB cites capital requirements as one driver of this decline, noting that they are more onerous for securitisations than covered bonds. Other causes put forward by the central bank include lower credit growth and favourable funding terms on the financial markets.

Retained Dutch securitisations in 2015 totalled €14.8bn, a 3% decrease from 2014, and outstandings now total €165bn. RMBS accounts for €157bn of this figure.

In 2014 and 2015, covered bond issues totalled €3.9bn and €4.6bn respectively, due to attractive funding costs, partly on the back of the ECB's covered bond purchase programme. Moreover, conditional pass-through covered bonds have also become an interesting option for smaller banks, as this type of instrument enables them to raise a relatively higher amount in funding for each mortgage.

Structured Finance

RPL, NPL approach updated

Moody's has made updates to its rating methodology for securitisations backed by NPLs and reperforming loans (RPLs). The changes incorporate proposals that the agency made late last year in a request for comment on the rating approach (SCI 25 November 2015).

The main changes involve a consolidation of the approaches Moody's has used to rate RMBS of NPLs and RPLs into a single methodology. However, it says the changes will not have any effect on its current ratings.

"NPL and RPL RMBS have similar features to seasoned RMBS in that the loans are in various stages of payment and distress," says Alberto Barbachano, a vp and senior credit officer at Moody's. "For that reason, our loan-level analysis of NPLs and RPLs assesses potential losses in severe recession scenarios considering the same characteristics as described in our primary methodologies for RMBS."

Moody's adds that its estimation of recovery values on the NPLs and RPLs' mortgage loans takes into account the extent and quality of data. This data includes characteristics such as LTV ratios, the size of the loans, the type and locations of the underlying property, the stage of delinquency or default and the servicer's loan recovery strategy and capabilities.

The updated methodology replaces Moody's previous approach for rating securitisations backed by NPLs.

Structured Finance

Auto deals driving ABCP

A recent surge in outstanding ABCP has been driven by increased auto issuance, according to S&P. However, the agency questions the durability of the sector's rally, suggesting that its growth has been overreliant on auto-related deals.

The ABCP market has risen by 23% in issuance since September 2015, over three-fourths of which has come from auto securitisations. If growth continues on this recent trajectory, outstanding volume could surpass U$350bn by year-end.

The rise in auto deals between September 2015 and January 2016 pushed bank sponsors to subsequently increase maximum seller commitments by over US$6bn in February. In addition, issuers' rush for funding led capacity utilisation rates to rise as high as 80% during this time.

Nonetheless, S&P says that the abnormal growth trend for auto-related deals indicates that much of the recent increase in the market's outstanding ABCP is tied to cyclical, rather than secular, growth factors. For example, it explains that the rising number of auto receivable deals uplifts issuances in both term and commercial paper markets.

Recent volatility in the financial markets, in turn, may have momentarily shifted auto lenders' relative funding preferences toward short-term financing. As a result, the expectation is that neither of these should persist over the rest of the year.

Instead, auto deals are expected to normalise and lead to lower growth rates in related commercial paper. S&P also says that further short-term rate hikes by the US Fed will not have a fundamental effect, believing that tight spreads between long-term and short-term interest rates will ultimately incentivise issuers to favour traditional longer-term markets.

Nonetheless, a number of recent trends suggest that the ABCP market is still edging towards more stable, organic growth. Since September, a majority of conduits with ABCP issuances rated by S&P raised maximum seller commitments by at least 5% individually. Capacity utilisation rates also increased for most conduits.

The market's improving growth prospects has also extended across other asset types. For example, seller commitments for consumer loan and equipment leases have grown steadily in the past few months, with outstanding ABCP for both asset types increasing more than 10% since last year's lows in September. In addition, outstanding commercial paper backed by residential mortgages increased by over 50% since last September.

The capital requirements of Basel 3 has also prompted market players to propose new conduit structures. If successful, these could provide regulatory relief to sponsors that are required to post additional assets against maturing liabilities.

Structured Finance

Further delay for Madden case?

The US Supreme Court has asked for the views of the US solicitor general before deciding whether to hear an appeal from the Second Circuit Court of Appeals regarding the Madden vs Midland case. The move is likely to further delay a final decision in the Madden appeal.

The solicitor general represents the federal government before the Supreme Court, which then seeks the view of government on significant cases. The solicitor general is likely to consult with banking agencies and then file its viewpoint with the court, which will then decide whether to hear the case.

The Second Circuit court ruling from May 2015 means that a non-bank holder of a loan no longer receives federal preemption afforded to the bank (SCI passim). Instead, it is limited to charging interest in accordance with state usury rates.

Midland Funding - the purchaser/assignee of the Madden loan - applied for a rehearing of the case by the Second Circuit, which was denied. Midland then filed a petition for writ of certiorari, asking the Supreme Court to hear the case.

In the meantime, the Madden decision remains in effect for the three states in the Second Circuit - Connecticut, New York and Vermont. It doesn't yet affect other states, but state courts could look to Madden vs Midland in establishing similar legislation.

Structured Finance

MPL-linked bond debuts

Fintex Capital has issued what is believed to be the first marketplace lending-linked bond of its kind. The move coincides with the completion of the firm's inaugural investment via a marketplace lending platform, German consumer lender auxmoney.

Fintex's strategy is to purchase sizeable portfolios of loans originated by leading marketplaces as principal. Investors then purchase bonds issued by the firm that are directly linked to discrete loan portfolios. The bonds carry an ISIN and are settled through Euroclear and Clearstream.

Fintex Capital was created in 2015 to originate, structure and manage bespoke P2P investments for professional investors. The aim is to deliver capital preservation, consistent income and superior risk-adjusted returns.

Based in London, the Fintex team has a long-standing track record in investment structuring and asset management, as well as thorough investment experience within P2P lending. The firm was founded by Robert Stafler and Jérôme Anglade, who are both marketplace lending and structured credit veterans.

Stafler is ceo of Excellion Capital and was previously at JPMorgan and JPMorgan Cazenove. Anglade co-founded Maple Bay Asset Management and was previously at Morgan Stanley, Bank of America Merrill Lynch and Citi Capital Advisors.

Stafler comments: "Our aim is to take P2P lending 'mainstream' among institutional investors by making it as easy and hassle-free as possible for them to invest on the marketplaces they like. Fintex was specifically designed as an issuer of debt instruments that investors are intimately familiar with. In doing so, we provide a missing link between Europe's leading marketplace lending platforms and global capital markets."

The firm has a number of investment mandates from a diverse range of investors that prefer bespoke and transparent investments over traditional investment funds.

CDO

Trups CDO defaults, deferrals flat

US bank Trups CDO combined defaults and deferrals remained at 17.4% at end-February, according to Fitch's latest index results for the sector. Three performing issuers representing US$20m across three CDOs redeemed their Trups last month, while one deferring issuer representing US$12m was sold across two CDOs - realising a 50% recovery - and was removed from the portfolio.

One issuer representing US$4m of notional in one CDO re-deferred. But there were no new defaults or cures in February.

Across 74 Fitch-rated bank and mixed bank/insurance Trups CDOs, 228 defaulted bank issuers remain in the portfolio, representing approximately US$5.2bn of collateral. As of February, 104 issuers were deferring interest payments on US$1.3bn of collateral, compared to US$1.8bn of notional deferring a year previously.

CDS

EM CDS volumes tumble

Emerging market CDS trading volume declined by 35% in 4Q15 from the same time a year earlier, according to EMTA's latest index results for the sector. The survey of 13 major dealers reveals that trading stood at US$254bn during the quarter, which also represents a 33% decrease in volume from 3Q15.

The largest trading volumes came from Brazil, at US$37bn, while Turkey and Russia reported US$26bn and US$25bn in volume respectively. The survey also includes volumes on nine corporate CDS contracts, with the highest reported quarterly volume on Petrobras and Pemex, both at US$2.1bn.

CDS

Pacific auction due

The auction to settle the credit derivative trades for Pacific Exploration & Production Corporation CDS will be held on 6 April. ISDA's Americas Determinations Committee resolved that a failure to pay credit event occurred in respect of the entity earlier in March (SCI 14 March).

CLOs

Settlement failure provisions assessed

New CLO provisions that allow for certain asset-settlement failures without triggering an EOD are credit positive because they help otherwise healthy transactions avoid a potential acceleration or liquidation, Moody's notes in its latest CLO Interest publication. These provisions allow redemption notices to be unconditionally withdrawn one or two business days before the scheduled redemption, or exclude any failure to execute an optional redemption or an asset settlement from EOD definitions.

Moody's notes that one US CLO it rated recently went a step further, allowing for certain timing-related asset settlement failures at any time without triggering an EOD, not just in the case of an optional redemption.

CLOs are most vulnerable to settlement failures when selling assets as part of an optional redemption. The failures can stem from delays at the loan administrative agent or other administrative errors.

Certain asset settlement failures do not hinder a CLO's ability to repay its obligations, but can nonetheless still trigger an EOD. As a result, senior-most noteholders can opt to liquidate the deal's assets and pay down all noteholders or accelerate senior principal payments only by diverting subordinate note payments. Both scenarios would be credit negative for all but the senior-most noteholders.

To safeguard against manager exploitation, the provisions are only applicable in situations where the delayed or failed settlement is a result of circumstances beyond the control of the CLO or its manager and the issuer has made reasonable efforts to facilitate the settlement.

Before CLO 2.0 deals started introducing these new provisions, most CLO 1.0s and early 2.0s had several other provisions to guard against optional redemption failures. These include requiring the CLO portfolio's value to be at least equal to the redemption price of the outstanding notes after applying a haircut to each asset's market value and allowing a manager to withdraw a redemption option until it certifies that it has entered into binding commitments with a counterparty to purchase the assets.

Moody's says the new provisions of CLO 2.0s are broader than the older provisions. "They allow the CLO to avoid an EOD if for any reason it does not have sufficient proceeds to redeem notes or more generally for certain timing-related settlement failures. In addition, the provisions are applicable up to as late as one business day prior to the redemption date," it explains.

The new provisions stem from the 2013 default of Integral Funding, when delays in the settlement of some asset sales resulted in insufficient proceeds on the redemption date to repay the outstanding notes.

CMBS

CMBS portfolio offloaded

American Capital has sold a US$64.9m portfolio of CMBS bonds to an undisclosed, unaffiliated group of third parties. The sale includes related fee agreements and select collateral administration rights. The firm says that the assets within the portfolio have a fair value of approximately US$40.4m as of end-2015.

CMBS

Strategic transaction on hold?

Chinese investors have dominated the US hotel investment landscape recently, aggressively bidding on mostly upper-tier assets in core markets. Historically, this type of activity - rich property valuations paid by less-established (often international) market participants - has corresponded with US commercial real estate cycle peaks, according to Fitch.

Chinese insurer Anbang Insurance Group last week reportedly offered to acquire the Strategic Hotels & Resorts assets from Blackstone for US$6.5bn (a US$450m premium to Blackstone's purchase price in December 2015). Starwood Hotels & Resorts also disclosed an unsolicited indication of interest of US$78 per share from an Anbang-led investor consortium that includes JC Flowers and Primavera Capital Group. Starwood subsequently notified Marriott that it intends to terminate their previous merger agreement and the latter has until 28 March to negotiate a revised offer.

This follows Hersha Hospitality Trust's sale in early February of a 70% joint venture interest in seven limited service hotels in New York for US$571.4m to China-based Cindat Capital Management.

Fitch suggests that Anbang's purchase of Strategic will likely delay (or scuttle) the planned large loan/single-borrower (LL/SB) US CMBS transaction related to Blackstone's acquisition of the company.

Meanwhile, the agency also notes that hotels may have sidestepped some regulatory uncertainty relating to CMBS risk retention, following the House Financial Services Committee's passage of HR 4620, which modifies Dodd-Frank's risk retention requirements for 'prudently underwritten, low-risk commercial real estate loans'. LL/SB CMBS transactions - an important financing avenue for hotels - generally fit this description.

"Absent risk retention relief, we believe the common one-year term with multiple-year extension options for hotel loans may have proven unpalatable to B-piece buyers, resulting in less available and more expensive debt capital for hotels," Fitch observes.

CMBS

Energy turmoil hits Canadian CMBS

Of the 331 loans in Fitch-rated Canadian CMBS, six have transferred to special servicing due to oil industry exposure, as of the March 2016 remittance. This represents 2.4% of the total C$2.7bn of Canadian transactions across nine conduits and one large loan transaction.

The affected loans are: Lakewood Apartments (representing 8.3% of IMSCI 2012-2), Lunar & Whimbrel Apartments (3.2% of IMSCI 2013-3), Snowbird & Skyview Apartments (3% of IMSCI 2013-3), Parkland & Gannet Apartments (2.6% of IMSCI 2013-3) and Nelson Ridge (7% of IMSCI 2013-4 and 2.8% of IMSCI 2014-5). They transferred to special servicing for imminent monetary default and are secured by multifamily properties in Fort McMurray, a region predominantly dependent on the oil industry.

The loans all have the same sponsor, Lanesborough REIT, which indicated an inability to pay debt service as vacancy has spiked at the properties due to the economic turmoil in the energy industry. According to recent filings, the sponsor is negotiating with its lenders in an effort to stabilise operations.

The total Alberta - which is Canada's leading province in the oil industry - exposure is 42 loans, with a UPB of C$486.6m, or 17.8% of the Fitch-rated collateral by balance.

RMBS

FNMA completes largest CIRTs

Fannie Mae has completed its latest set of Credit Insurance Risk Transfer deals, the largest cumulative transactions to date in the GSE's programme. The completion of CIRT 2016-1 and CIRT 2016-2 shifts a combined US$19.5bn of risk on pools from single-family loans to a group of insurers and reinsurers, with the loans acquired between December 2014 and April 2015.

The latest deals push Fannie Mae's total acquisitions to over US$1.7bn of insurance coverage on over US$66bn of loans. These have come through nine CIRT transactions altogether since the programme's inception in 2014. The covered loan pools for the CIRT 2016-1 and 2016-2 transactions consist of 30-year fixed rate loans with LTV ratios greater than 60% and less than or equal to 80%.

In CIRT 2016-1, Fannie Mae retains risk for the first 50bp of loss on an US$8.8bn pool of loans. If this US$44m retention layer is exhausted, reinsurers would cover the next 250bp of loss on the pool, up to a maximum coverage of approximately US$220m.

For CIRT 2016-2, the GSE retains risk for the first 50bp of loss on a US$10.7bn pool of loans. In this case, an insurer would cover the next 250bp of loss on the pool if its US$53m retention layer was exhausted. This cover would be up to a maximum coverage of roughly US$267m.

In both deals, coverage is provided based upon actual losses for a term of 10 years. Depending upon the pay-down of the insured pool and the principal amount of insured loans that become seriously delinquent, the aggregate coverage amount may be reduced at the three-year anniversary and each anniversary thereafter.

RMBS

Pepper RMBS largest for decade

Pepper Group has priced a new A$700m-equivalent non-conforming RMBS, the largest to hit the Australian market since 2006. Pepper Residential Securities Trust No. 16 is also the company's largest deal to date.

The deal was originally sized at A$600m, but was upsized upon strong demand that scaled up the order book. At the initial deal size, the book was oversubscribed by about 85%.

The transaction includes a senior A$122m A1A tranche, which priced at BBSW plus 170bp. The tranche has been rated triple-A by both Moody's and S&P.

The most senior tranche - the A1U1 - is denominated in US dollars and totals US$280m. Moody's and S&P assigned the notes A-1+ and P-1 ratings respectively.

PRS16 also includes a A$93.8m A2 tranche and a A$61.6m class B tranche. Only the most subordinate tranche, the G class, was unrated.

Pepper says that the book build involved 22 accounts participating in the deal. Approximately 79% of the book was represented by real money investors, with 76% being offshore. The deal has a settlement date of 31 March, with a five-year clean-up call due for March 2021.

National Australia Bank, Commonwealth Bank and Westpac Bank assisted Pepper on the deal. Citigroup and NAB Securities assisted from the US side.

RMBS

Freddie offloads more NPLs

Freddie Mac has sold off a further US$1.4bn of seriously delinquent loans serviced by Nationstar Mortgage. The latest sales consisted of two transactions via auction: an extended timeline pool offering (EXPO) on 10 March and a standard pool offering (SPO) on 25 February.

Freddie began marketing the pools earlier this year (SCI 27 January), in which the loans were offered as seven separate pools of mortgage loans. Two of the pools were EXPO assets, consisting of Florida mortgage loans and targeting participation by smaller investors, including non-profits and minority and women owned businesses. Five of the pools were geographically diverse SPO pool offerings.

The transactions are expected to settle in April and May respectively, which will result in a further 6,816 NPLs off Freddie Mac's book. Community Loan Fund of New Jersey was the winning bidder on the two EXPO pools, while two for-profit entities were the winning bidders on the SPOs. LSF9 Mortgage Holding took three of the SPO pools, while Rushmore Loan Management Services won the other two.

According to Freddie, the loans have been delinquent for an average of almost four years. Mortgages that were previously modified and subsequently became delinquent comprise approximately 34% of the aggregate pool balance. The aggregate pool has a LTV ratio of approximately 97%, based on broker price opinions.

Wells Fargo, Credit Suisse and The Williams Capital Group all advised Freddie Mac on the transactions.

RMBS

TRID error treatment progressing

A SFIG industry working group focused on the treatment of TRID errors in the US RMBS secondary market has provided rating agencies with a draft proposal for the due diligence grading of the issues. The draft proposal reflects several months of collaborative discussions between third-party review (TPR) firms, attorneys, issuers and rating agencies.

Initial due diligence sampling of prime jumbo mortgages in the secondary market has indicated many compliance issues thus far, most of which appear to be good faith errors, according to Fitch. The ambiguity in the rule and a lack of judicial precedent has caused uncertainty regarding assessing the materiality of the errors and how to resolve them.

The draft proposal remains subject to further review and approval of the SFIG membership. Nonetheless, Fitch feels the current proposal addresses the rule's ambiguous areas in a reasonable manner. Namely, it gives consideration to the CFPB's informal guidance and also gives consideration to good faith attempts to resolve issues that do not have cures explicitly defined in the rule.

The agency believes the market disruption to date caused by TRID errors has been disproportionate to the amount of risk the errors pose for RMBS investors. Investors will likely only be exposed to maximum statutory damages of US$4,000 plus attorney's fees. Consumer claims in defense of foreclosure may occur in judicial states as the consumer will be working with an attorney; defensive claims in non-judicial states or affirmative claims in any state are less likely.

Fitch currently expects few unresolved TRID errors that are likely to be eligible for damages to remain in final securitised mortgage pools. To the extent present, investors will benefit from modestly higher credit enhancement to help mitigate the risk. Additionally, for transactions with sufficient representations and warranties frameworks, RMBS investors will potentially benefit from the representations by the issuer intended to protect them from losses related to compliance issues.

The proposal is expected to be finalised over the next few weeks and will be included in the SFIG RMBS 3.0 Green Papers.

RMBS

GSEs auctioning bulk MSRs

Fannie Mae and Freddie Mac have put a US$6.2bn bulk mortgage servicing rights portfolio up for auction. MountainView Servicing Group, which is advising the GSEs on the sale, says that bids for the portfolio are due on 29 March.

The portfolio comprises servicing rights on 26,180 fixed-rate and first-lien mortgages. The loans have a weighted average original credit score of 777, a weighted average original LTV ratio of 74% and a weighted average interest rate of 3.69%.

The portfolio also has no delinquencies and an average loan size of US$236,605. Top states for the assets are California (17%), Massachusetts (7.4%), Texas (7.3%) and Washington (6%).

"This conventional MSR portfolio consists of lower-coupon, low-California concentration servicing, which will be appealing to both bank and non-bank MSR buyers," says Matt Maurer, md at MountainView.

RMBS

RMBS rating revision for trio

S&P is requesting feedback on revisions it has made to rating RMBS and covered bonds backed by French, Belgian and German residential loans. The proposed changes aim to align the analytical framework with that applied for pools of residential loans in other jurisdictions globally, but will define adjustment factors that are specific to each country.

The proposals consider a combination of debt to income (DTI) and LTV ratios at origination as key predictive factors of credit risk for French residential loans. The new criteria would reduce the foreclosure frequency for loans where these ratios are low. However, it would increase this frequency for loans with DTI ratios greater than 40%.

Further, there would be increased market value decline stresses and an increase in the cashflows received from guarantees on residential loans. S&P adds that Belgian predictive factors mirror much of the French, thus prompting a similar set of rating adjustments by the agency for that jurisdiction.

However, the LTV ratio at origination is considered the sole predictive factor of risk for Germany. The proposed adjustments would result in a greater increase to the foreclosure frequency for loans with originations LTVs greater than the archetype 73%. S&P says that the adjustments are materially greater for loans with very high origination LTVs, above 100%.

The agency tested the proposed criteria on a sample of representative RMBS deals across France, Belgium and Germany. If adopted as proposed, it expects no ratings impact on transactions in France and Belgium. There could be negative ratings impact on certain non-prime German RMBS deals backed by loans with very high origination LTV ratios. S&P expects to lower its ratings on the senior tranches of such transactions by approximately one rating category.

The agency says that the criteria applies to all new and existing ratings on RMBS backed by residential loans in the affected countries. Comments are encouraged to be submitted by 29 April.