Contents

Secondary markets

Euro secondary returns

After a quiet few sessions surrounding the long weekend the European securitisation secondary market looks to be returning to life.

Yesterday once again saw light activity but tone remains overwhelming positive across most European ABS/MBS sectors and spreads remain well supported as more and more participants return post-Easter. Meanwhile, CLOs continued to lead the way in terms of both activity and spread tightening, which saw mezz paper edge in once again day on day.

After a series of light sessions the BWIC calendar also picks up a little today with four lists on the schedule so far, albeit primarily involving small clips. The two chunkiest auctions come at 15:00 London time.

One is a three line €8.4m CMBS mix comprising DECO 2014-BONA F, TAURS 2015-DE2 F and TIBET 1 D. None of the bonds has covered on PriceABS in the past three months.

The other involves two CLO line items - €5m HEC 2006-NX C and €7.5m HSAME 2006-IIX D. Only HEC 2006-NX C has covered on PriceABS in the past three months - at 92.5 on 24 February.

In addition there is a 23 line Dutch OWIC due by 14:00. It involves up to €50m each of: ARENA 2012-1 A2, ARENA 2014-1NHG A2, ARENA 2014-1NHG A3, ARENA 2014-2NHG A1, ARENA 2014-2NHG A2, ARENA 2014-2NHG A3, DMPL X A2, DRMP 1 A1, DRMP 1 A2, HYPEN 3 A1, HYPEN 3 A2, HYPEN 4 A1, HYPEN 4 A2, LUNET 2013-1 A2, ORANL 2015-11 A, PHEHY 2013-1 A2, SAEC 12 A2, SAEC 13 A1, SAEC 13 A2, SAEC 14 A1, SAEC 14 A2, SAEC 15 A1 and SAEC 15 A2.

Secondary markets

US CLOs busy

Supply keeps on coming in the US CLO secondary market.

"It's very busy day today, which is a function of both quarter-end and spreads continuing to tighten," says one trader. "That's especially true in mezz, which was underwater and now very clearly isn't."

Consequently, the trader adds: "We're seeing people testing mezz demand and every day seems to see a new tighter double-B print, which is where most of the supply is while there continues to be a scarcity of single-, double- and triple-As. The question is will dealers be willing to keep adding in such size so close to quarter-end - if all today's lists trade that will be a very robust sign indeed."

Meanwhile, the trader notes: "Some Trups CDOs have popped up on BWIC today. If they trade well that will help a market that has largely been absent this quarter."

There are currently eight BWICs on the US CLO calendar for today. The largest is a $61.373m 18 line 1.0 and 2.0 mix of single- and double-Bs due at 10:00 New York time.

It comprises: APID 2013-14A E, ARES 2007-3RA E, ARES 2014-32X E, BRCHW 2014-1A E1, CGMS 2015-1X E1, CLRLK 2006-1A D, EMNPK 2013-1A E, GALE 2007-3A E, GALE 2007-3X E, KEUKA 2013-1X E, NEUB 2012-12A ER, NEUB 2014-16X F, PPARK 2014-1A E, SHSQR 2013-1A E, SHSQR 2013-1A F, SPARK 2014-1X E, THRPK 2014-1X E1 and TRMPK 2015-1X E. Only NEUB 2012-12A ER has covered with a price on PriceABS in the past three months - at M90H on 28 March.

The above-mentioned Trups auction is at 11:00. The six line $25.751m list consists of: ALESC 14A C3, PRETSL 25 C1, TBRNA 2005-2X A2, TBRNA 2005-3X A2A, TPREF 3 B2 and TRAP 2006-11X A2. None of the bonds has covered on PriceABS in the past three months.

Secondary markets

Euro secondary stifled

Sentiment continues to be strong across the European securitisation market but technicals are stifling activity.

Buying interest remained apparent throughout ABS/MBS yesterday with the exception of UK RMBS, which is seeing some investors hold back over Brexit uncertainty. However, flows overall were still light and there were significant DNTs on BWIC as the gap in buyer and seller expectations for current levels widened. Meanwhile, CLOs continue to be the most boisterous sector, but lack of paper is stifling trading.

There is currently only one BWIC on today's European schedule. At 14:00 London time there is a CLO auction amounting to €18.5m across five line items now that two of the bonds originally on the list have traded early. The auction currently comprises: AVOCA V-X E, CELF 2006-1X E, DRYD 2013-29A F, HARVT 14X E and LIGHP 2006-1X E. None of the bonds has covered with a price on PriceABS in the past three months.

In addition, there is a 23 line Dutch OWIC due by 14:00 today that was incorrectly shown as being due yesterday. It involves up to €50m each of: ARENA 2012-1 A2, ARENA 2014-1NHG A2, ARENA 2014-1NHG A3, ARENA 2014-2NHG A1, ARENA 2014-2NHG A2, ARENA 2014-2NHG A3, DMPL X A2, DRMP 1 A1, DRMP 1 A2, HYPEN 3 A1, HYPEN 3 A2, HYPEN 4 A1, HYPEN 4 A2, LUNET 2013-1 A2, ORANL 2015-11 A, PHEHY 2013-1 A2, SAEC 12 A2, SAEC 13 A1, SAEC 13 A2, SAEC 14 A1, SAEC 14 A2, SAEC 15 A1 and SAEC 15 A2.

Secondary markets

US CLOs still strong

The US CLO secondary market looks like it is set for a quieter day today, but sentiment is still strong.

"It's relatively quiet today thanks to quarter-end, but we saw quite a bit of activity yesterday and spreads are still firm," says one trader. "A high proportion of bonds traded on the bid lists yesterday and once the new quarter starts I expect sellers to continue to test liquidity."

Overall, the trader continues: "The market feels good and the rally seems like it could be sustainable. However, there is still an element of bifurcation in that maybe some of the weaker bonds haven't rallied as much."

The rally remains mezz focused, but the trader notes that there is activity elsewhere too. "There were some triple-As in for the bid yesterday and they traded in the mid-160s to low-170s - 15-20 basis points tighter than four weeks ago. That shows the rally is moving up the capital structure, but for today and tomorrow at least lists still predominantly involve mezz."

There are currently four fairly small BWICs on today's CLO calendar. The most sizeable piece on offer comes as a $40m single line of WSTC 2014-1A A2 due at 13:00 New York time. The double-A tranche has not appeared on PriceABS before.

ABS

CHAI print points to value

In its latest monthly update, PeerIQ suggests that the recent CHAI 2016-PM1 print illustrates the thawing that has occurred in the US securitisation market over the last month. Spreads across the transaction's capital structure are almost double those of the CHAI 2015-PM3 deal from December (see SCI's new issue database), but this is said to be reflective of increased financing costs across the market.

"Deals are getting done, albeit at higher financing costs," the firm notes. "We have an improved macro picture today, compared to the time of ABS West in late-February. This is a positive for institutional investors who are looking for the best value in credit spread products, which are still leaning towards their wider end of the historical range."

The pricing of the 2016-PM1 marketplace lending ABS has been widely debated in the context of the lack of a Moody's rating (Fitch and Kroll rated the deal) and the agency's review for possible downgrade of the class C tranches of three previous deals from the shelf (SCI 25 February). However, PeerIQ states that analysis of the CHAI programme in fact provides an insight into how much financing costs have increased over time for marketplace lending.

Citi has brought four CHAI transactions securitising Prosper loans. Coupons gradually increased (by around 100bp) from the first deal (which was launched in July 2015) to the third.

"Higher financing costs imply lower margins for institutional investors, who will demand a commensurate step-up in rates to earn the same net return. This is exactly what happened in CHAI 2016-PM1 and why we see platforms responding by raising rates accordingly. Today, the securitisation market is offering yields to institutional investors that in some cases are more attractive than funding the whole loans themselves," PeerIQ notes.

The firm adds that while platforms that do not fund via the ABS markets may feel they are isolated from the effects of wider credit spreads or may believe that superior underwriting is sufficient to attract capital, such views are incorrect. "Consider a platform that has a 2%-3% reduction in cumulative credit losses as compared to another platform for a similar risk cohort. All things being equal, the investor is still better off buying ABS where they enjoy 12% in credit enhancement, as in the recent CHAI deal. Smaller platforms that have not performed a securitisation must increase the net returns of their loans (after financing costs and expected charge-offs) to compete for investor attention."

CS

Structured Finance

Data firms diversify

Orchard has revealed that it has applied for a broker-dealer license, indicating a change of tack for the data and analytics firm. The company believes it is the next natural step in its role as a neutral facilitator of marketplace lending investment.

In terms of what may have prompted this move, Orchard owner and ceo David Snitkof states: "Orchard sees an opportunity to create an enormous amount of value for originators at the capital acquisition stage. We are exploring opportunities to both transform the primary market in marketplace loans and create a secondary market, where none currently exists. Given the precise nature of the models we are exploring, we feel that forming a broker-dealer for purposes of facilitating electronic transactions is the most prudent course for Orchard."

Additionally, the data firm recognises the potential for becoming involved with securitisation of marketplace loans. Snitkof continues: "Should we determine that there is an attractive business opportunity with regard to securitisations, having a broker-dealer will be advantageous there as well."

Despite this willingness to become more involved in the deal-making process, Orchard still strives to remain neutral. Snitkof explains: "We are firmly committed to being a neutral, agency-only facilitator of both sides of the market, offering transparent, technology-enabled solutions to capital markets problems."

Another firm occupying a similar space to Orchard is start-up dv01, which provides real-time data on marketplace loans at the pool and individual level. While it is currently moving ahead with a single goal to provide greater clarity for investors on marketplace loans, the firm recognises the potential for diversification down the line, both in terms of securitisation and asset class.

Perry Rahbar of dv01 states: "We've jumped in with marketplace lending initially and want to provide transparency and depth in terms of the loans themselves. But over time we aim to provide analysis of securitisations of marketplace loans as well, in order to give depth and transparency to the underlying collateral of these deals."

While still in its relatively early stages, Rahbar hopes that dv01's work can help increase deal flow in the market by boosting understanding of the asset class and so buoying investor confidence. "Over time, we hope to provide this kind of transparency and so boost the industry through more investment and securitisations."

RB

CDS

Antitrust objections filed

A number of potential claimants in the CDS antitrust lawsuit have filed objections to the preliminary settlement order (SCI 2 October 2015).

MF Global Capital, for one, argues that the distribution plan: defines 'covered notional' in a uniform way that assumes all CDS transactions had substantially similar bid-ask spreads; fails to capture 320 CDS trades entered into by MF Global Capital that are 'covered transactions'; is unclear whether all potential antitrust claims would be released under the settlement terms; and has a 'one size fits all' methodology that leads to unfair distribution. A recent NewOak memo suggests that these objections may have been acknowledged by counsel for the plaintiffs in the context of interest rate swap trading.

The firm points to the Public School Teachers' Pension and Retirement Fund of Chicago vs Bank of America Corporation et al case, in which plaintiffs allege an anti-competitive distinction between dealer-to-dealer trading and non-dealer-to-dealer trading. The plaintiffs claim that dealer banks conspired to ensure that only the dealers are allowed to trade IRS on these platforms and that Tradeweb Markets essentially prices non-dealers out of the market.

"These allegations against Tradeweb Markets in the interest rate swap context appear to be very similar to the complaints levelled against Markit Group in the CDS context," the NewOak memo notes.

The firm goes on to question whether, absent the alleged behaviour, all plaintiffs would really have paid the same price for the same CDS contract. "One price for all CDS contracts would occur if counterparty risk was not an element that was factored into the price of the trade, so to account for the credit risk that the paying-party on a CDS would be able to honour its obligation to the purchaser of the CDS. If the alleged behaviour never occurred, would the CDS for a particular issuer have been available at a single price regardless of the provider of protection? A buyer of CDS protection is concerned about the credit risk of its counterparty and this credit risk is taken into account as a credit charge, which is added to the spread on the CDS contract."

MF Global is calling for the identification of various transaction circumstances that would trigger an adjustment to the notional amount to ensure the anti-competitive spread is applied fairly to all legs of packaged transactions, encouraging a beneficial redistribution of funds to the benefit of the majority of the class. Additionally, it suggests that the allowance for bid/ask inflation should be adjusted for claimants who can demonstrate that they disproportionally suffered higher transaction costs as a result of the alleged antitrust behaviour.

Another potential claimant - Silver Point Capital - complained that an adequate amount of time was not provided for investors to consider their rights and/or opt out of the class. Meanwhile, Saba Capital objected that covered trades experienced disproportionate damages from those proposed in the settlement guidelines, depending on whether the transaction at issue was a larger trade, an index trade or a single name trade.

CS

CMBS

CMBS 2.0 delinquencies spike

US$152m of US CMBS 2.0 collateral across 17 loans became newly delinquent in March, including six loans secured by properties located in oil boom regions, marking the largest one-month increase in delinquencies since November 2012. A total of 59 loans with a balance of US$586m were delinquent at the end of last month, resulting in a delinquency rate of 25bp, according to Morgan Stanley figures.

Further, 14 loans totalling US$195m transferred to special servicing, including 10 that are located in oil boom regions and aren't already delinquent. This is the largest monthly increase seen in the specially serviced rate since October 2012.

The largest loan to become specially serviced during the month is the Dickinson, North Dakota US$27m States Addition Apartments (securitised in WFRBS 2014-C22), which is being reviewed to determine a workout strategy (see SCI's CMBS loan events database). In total, 72 loans with a balance of US$938m were specially serviced by end-March, resulting in a specially serviced rate of 41bp.

Meanwhile, Morgan Stanley CMBS strategists report that 145 loans totalling US$2.5bn were watchlisted last month, the largest of which is the US$105m Solano Mall (COMM 2012-CR3). Sports Authority (occupying 7.43% of the property) is considered a significant tenant under the loan documents and its bankruptcy filing triggered a cash sweep event.

A total of 1,070 loans with a current balance of US$17.6bn are now on the watchlist, resulting in a watchlist rate of 7.62%.

Two loans were assigned appraisal reductions in March, including the US$13.95m Minot Hotel Portfolio (WFRBS2013-C11), with a US$3.48m appraisal reduction amount. This loan was also transferred to special servicing.

Finally, 22 loans worth US$523m paid off last month, pushing the total CMBS 2.0 pay-offs to 323 loans with a balance of US$7.3bn. The most significant loan to pay off in March was the US$25m Colony Hills - Sandpiper and Cabana Apartments (COMM 2013-CR9), which paid off in full without penalty, despite its June 2018 maturity and being fully locked out until April 2018.

The largest loan to defease of the 16 loans worth US$341m that did so in March was the US$111.9m Copper Beech Portfolio (GSMS 2011-GC5). In total, 247 loans with a balance of US$4.9bn have now defeased, according to Morgan Stanley.

CS

Structured Finance

Business litigation team boosted

Morrison Cohen has hired Jason Gottlieb as partner in its business litigation department. He joins following his role as counsel for the litigation group at Curtis, Mallet-Prevost, Colt & Mosle.

Gottlieb's practice focuses on business litigation and arbitration involving securities, financial products, financial markets, real estate and intellectual property. His experience includes litigation and regulatory work in structured finance.

Structured Finance

Goldberg bolsters commercial practice

Goldberg Segalla has brought in Louis Russo as partner and a member of its business and commercial practice group. He moves from Alston & Bird, where he was counsel.

Russo will provide Goldberg with experience in contract and fraud-based disputes, involving financial services, corporate governance, securities fraud, employment, and residential and commercial loan servicing. He has represented trustees and liquidating trusts involved in lawsuits over UK bank RMBS representation and warranty issues, and has also served multiple trustees in litigations arising from disputes over CDO deals.

Structured Finance

Rating agency adds sales chief

Scope Ratings has appointed Sven Janssen to the newly-created role of chief sales and marketing officer, effective from today (1 April). He was previously head of debt capital markets at Oddo Seydler Bank and has also worked at Macquarie, Bank Metzler, Bank Sal Oppenheim and Hawkpoint Partners.

Structured Finance

Debt purchaser expands

Arrow Global Group has agreed terms for the acquisition of InVesting, a consumer debt purchaser and collections provider with operations in the Netherlands and Belgium, for a total consideration of around £78.5m. The firm says that Benelux is an attractive, established market, with regular portfolio sales by creditors offering good origination visibility.

InVesting provides servicing for €3.7bn of credit assets, in addition to associated services, such as debt factoring. With circa 500 people operating from five offices across the Netherlands and Belgium, InVesting provides a platform to accelerate Arrow's growth in the region, with access to deal flow and strong vendor relationships.

As at 31 December 2015, InVesting's portfolio consisted of €663m of face value across 502,000 accounts and a 120-month Estimated Remaining Collections (ERC) of €107m. The acquisition will be financed via existing debt facilities.

Tom Drury, ceo of Arrow Global, comments: "Arrow's data assets, a key source of advantage for the group, will be significantly augmented by InVesting's proprietary data sets. With InVesting already servicing existing Arrow portfolio assets, we are confident in a good strategic and cultural fit that will reinforce our existing customer-focused approach. The acquisition also further diversifies our income streams and we now expect our capital-light asset management operations to account for around 25% of group revenues on a pro forma basis for 2016."

CDS

ISDA DCs updated

ISDA has undertaken its annual change in composition of its five regional Determination Committees (DC), responsible for deciding credit events within the CDS industry. Nomura has been dropped from the list of 10 voting dealers, being replaced by former consultative dealer Mizuho Securities.

The other nine voting dealers for all regions remain the same as the year gone by. They are: Bank of America, Barclays, BNP Paribas, Citibank, Credit Suisse, Deutsche Bank, Goldman Sachs, JPMorgan and Morgan Stanley. SG is now the sole consultative dealer.

The voting non-dealers for all regions have seen more of a shake-up. BlueMountain Capital Management, Citadel and Elliott Management Corporation remain, and are now joined by AllianceBernstein and Cyrus Capital Partners. PIMCO has been moved to consultative non-dealer.

The firms will serve on the DCs from 29 April.

CMBS

CMBS lender beefs up

Mitch Resnick is set to join Walker & Dunlop Commercial Property Funding, Walker & Dunlop's CMBS lending platform, as md in late April. He will oversee WDCPF capital markets executions, with responsibility for pricing, hedging, securitisations and investor relations.

Resnick will be based in the firm's Bethesda, Maryland headquarters. He has extensive commercial real estate financing experience, having previously served as vp of capital markets at Freddie Mac and as a vp in Goldman Sachs' real estate finance group.

Insurance-linked securities

PartnerRe names chairman, ceo

John Elkann has been appointed as chairman of PartnerRe's board of directors, while Emmanuel Clarke has been announced as president and ceo. The board movements follow the approval late last year by PartnerRe shareholders to allow EXOR to finally purchase the company (SCI 20 November 2015) after months of debate and negotiation surrounding the future of the company.

Elkann's appointment adds to his current role as EXOR chairman and ceo. The approval of Clarke's appointment as ceo follows on from his positions as president and ceo of PartnerRe Global, roles that were assumed before the takeover.

Insurance-linked securities

Artex makes another acquisition

Artex Risk Solutions has strengthened its ILS capabilities further by acquiring Hexagon Insurance and its subsidiaries from Robus Group. This follows Artex's decision already this month to also purchase Kane's insurance management operations (SCI 22 March).

Hexagon exclusively provides PCC facilities to the ILS industry. Its three subsidiaries are Axe Insurance, Septagon Insurance and Hexagon ICC.

The sale of Hexagon also sees Justin Wallen and Ben Dunning make the transition over to Artex. Wallen was md at Hexagon, while Dunning served as director and group accountant.

The deal is expected to close on 31 March.

Insurance-linked securities

Everest names risk head

Everest Re Group has tapped Michael Kerner as its new evp and head of strategy and risk management. He arrives from Zurich Insurance Group, where he most recently held the position of ceo - general insurance.

Kerner's experience with Zurich also spanned various actuarial, reinsurance, underwriting and strategy roles. This included roles as ceo of global corporate in North America, global head of group reinsurance, general insurance chief underwriting officer and group head of strategy.

Insurance-linked securities

ILS lawyer added in NY

Winston & Strawn has appointed Keith Andruschak to its corporate practice in New York as a partner. He has over 20 years of experience in complex transactions involving the insurance industry, including ILS.

As well as structured finance, Andruschak advises clients on mergers and acquisitions, dispositions and joint ventures. He also advises the industry on unique insurance and annuity product designs, alternative risk transfer arrangements and derivatives

Andruschak was previously at Mayer Brown. He has also worked at Stroock & Stroock & Lavan and at Clifford Chance.

Risk Management

ESMA fines trade repository

ESMA has fined DTCC Derivatives Repository (DDRL) €64,000 for negligently failing to implement systems capable of providing regulators with direct and immediate access to derivatives trading data. Such access is a key requirement under EMIR.

It is the first time ESMA has taken enforcement action against a trade repository registered in the EU. DDRL is the largest EU registered trade repository.

ESMA says DDRL failed to provide direct and immediate access to derivatives data from 21 March 2014 to 15 December 2014. Access delays during that period increased from two days to 62 days after reporting and affected 2.6bn reports.

ABS

Chinese ABS expansion 'to continue'

China's securitisation market will continue to grow this year, albeit at a slower pace than in 2015, says Fitch. Issuance last year doubled to reach a record CNY600bn from more than 300 transactions.

Market expansion will be driven by regulatory changes which have made it simpler and more efficient for financial institutions to issue structured finance securities. The rating agency notes that the slowdown of China's economy could test the performance of CLOs, but says consumer credit is likely to continue expanding for many years to come as China's economy shifts to a consumption-driven growth model.

ABS

GE balloon risk ups volatility

Significant exposure to balloon loans across GE small-business loan ABS deals is unique among major sponsors in the sector. Balloon payments representing 38% of the current pool balances in transactions rated by Moody's are coming due, mainly within the next seven years.

Performance volatility is increasing as a result of occasional balloon loan defaults at loan maturity. Balloon loan exposure ranges from 28% to 51% of the deals' outstanding pool balances, with the average balloon payment in the transactions amounting to 65% of the loan original principal balance and 85% of the loan outstanding principal balance.

The overall performance of the balloon loans in the GE transactions has been fairly strong, despite the volatility. If a borrower is able to refinance the balloon loan then there is no risk of loan default, but there is refinancing risk in the transactions because the loans are backed by leased properties with a renewal date that frequently coincides with the balloon payment date.

"Success in re-leasing the properties will help determine whether the borrower successfully refinances. The volatility in the GE transactions owing to balloon loan refinancing risk will remain limited in the coming years provided that the lending environment remains relatively favourable," says Moody's.

ABS

Auto ABS ratings 'stable'

Fitch says that growing credit enhancement and robust loss protection should help US auto lease ABS ratings remain stable in 2016. This is in spite of a continued decline in used vehicle residual values (RV) due to increased leasing penetration and a higher supply of off-lease vehicles.

RV gains fell in 2015 as a result of high new car sales, increased vehicle incentives and higher off-lease and off-fleet supply. Fitch suggests that the dramatic rise in leasing activity and elevated off-lease volume of vehicles hitting the secondary market will continue to pressure used car prices.

As the economy has improved in recent years, so have both leased and overall vehicle sales. Auto manufacturer sales hit a high of 17.5 million in 2015, while leasing volume hit a record 32.3% penetration of total sales in February of this year.

Fitch's auto RV lease index had nearly US$6.9bn returns for its securitised RV amount in 2015. This is up from US$5.8bn in 2014, but is expected to jump up to US$8.5bn in 2016. However, as a result, residual gains in Fitch's auto RV lease index have declined steadily over the past 12 to 18 months. The index recorded a gain of 0.51% as of 4Q15, the lowest level since 2009 and down from 3.16% in 3Q15 and 3.91% at year-end 2014.

Nonetheless, Fitch adds that auto lease transactions have quickly de-levering structures and ample credit enhancement levels. This has driven a stable ratings expectation by the agency. It also anticipates upgrades to subordinate classes where appropriate in 2016.

The rating agency has also updated its auto-lease ABS rating approach. There have been no substantial changes and Fitch expects no impact on outstanding ratings.

Structured Finance

IRB variation proposals set out

The Basel Committee has opened up a consultation on new proposals to reduce the variation and complexity involved in calculating credit risk-weighted assets (RWA). The proposals offer a set of changes to the Basel framework's advanced internal ratings-based (IRB) approach for banks computing their RWAs and regulatory capital requirements.

Specific measures from the proposals include removing the option to use IRB approaches for certain categories, such as loans to financial institutions or asset-based finance. This is due to their lack of reliability in reflecting banks' risks.

In addition, the proposals would adopt exposure-level, model parameter floors. The Committee says that these would ensure a minimum level of conservatism for portfolios where the IRB approaches remain available and close the gap for capital requirements between IRB models and the standardised approach.

Finally, the Committee outlines a greater specification of parameter estimation practices. These would reportedly reduce variability in RWAs for portfolios where the IRB approaches remain available.

The Committee has previously consulted on the design of capital floors based on standardised approaches and is still considering the design and calibration. This would complement the proposed constraints that the Committee has set out in these proposals.

Moody's believes the proposals are a credit positive. Bank capital requirements are expected to be higher and more predictable.

The Committee welcomes comments on the proposals by 24 June. The changes are a part of a regulatory reform programme that the regulator intends to finalise by the end of 2016.

Structured Finance

Japanese rating upgrades increase

The upgrade rate for Japanese structured finance securities rose in 2015, notes S&P. S&P Japan raised 8.3% of its outstanding ratings on Japanese structured finance securities last year, up from 4.5% in 2014.

The 2015 upgrade rate exceeded the downgrade rate of 4.5% and resulted in an upgrade-to-downgrade ratio of 186%, which also surpassed the 2014 ratio of 143%. Separately from S&P Japan, Nippon S&P raised 22.5% of its outstanding ratings on Japanese structured finance securities and lowered 2.5% of ratings in 2015.

Structured Finance

Repo clearing blockchain considered

The DTCC has teamed up with Digital Asset Holdings to develop a distributed ledger solution which would seek to manage the clearing and settlement of US Treasury, agency and agency RMBS repo transactions. The project would see the corporation and company build and incorporate structured, cryptographic ledger entries into existing securities trade and settlement flows.

The DTCC notes it is specifically using the repo agreement clearing process to demonstrate the advantages of using ledger technology. The corporation says that it is a viable option to demonstrate how such a process can be streamlined, particularly as repo transaction volumes continue to grow.

The DTCC and Digital Asset Holdings will seek to reduce the risk and capital requirements for the repo market, which sees trades happen in multiple steps. The technology will enable the DTCC's Fixed Income Clearing Corporation subsidiary to become the settlement counterparty for repo transactions in real time. As of now, it only provides the matching and verification of the initial start leg of the repo.

This will hopefully allow additional netting and offsets. Further, the technology would enable all parties to the repo trade to view details almost immediately after the trade is executed. This could also allow buy- and sell-side firms to agree to repo trade details much more quickly.

The first phase of the project will start immediately, involving the development of a proof-of-concept and integrating it into the DTCC environment. Future phases will include collaboration and testing with market participants to ensure it is matching industry needs.

Structured Finance

Green bond evaluation service starts

Moody's has launched a new green bond assessment (GBA) evaluation and research service. The GBA service is intended to promote further disclosure and transparency and to set a standard for green bond issuances across sectors and geographies.

The rating agency notes that green bonds are an increasingly popular source of capital and issuance should increase for years to come. It adds: "GBAs offer a consistent, standardised and transparent approach for evaluating a green bond issuer's framework across various security types around the globe."

Moody's GBA will be separate from the credit rating process. It will be available either as a companion service to a public credit rating or as a standalone assessment.

The rating agency has also introduced a methodology for green bonds, with an assessment scale ranging from GB1 (excellent) to GB5 (poor). This scoring scale is based on an evaluation of organisation, use of proceeds, disclosure on the use of proceeds, management of proceeds and ongoing reporting and disclosure.

Structured Finance

SME instrument introduced

The European Commission, European Investment Fund (EIF) and European Investment Bank (EIB) have launched a new securitisation instrument that is designed to facilitate lending to SMEs under favourable pricing conditions. The framework for the mechanism - dubbed the SME Initiative Securitisation Instrument (SISI) - was created by amending the InnovFin and COSME Delegation Agreements.

SISI is available to financial institutions operating in EU Member States - which are invited to provide their expression of interest - and is administered by the EIF. The fund will facilitate the partial transfer of the credit risk of securitised loans by providing guarantees and/or through the purchase of asset-backed notes, in order to release regulatory and economic capital for originating financial institutions, which can then be used to originate new financing to SMEs at advantageous terms.

Structured Finance

Wolters enhances mortgage capabilities

Wolters Kluwer is set to add digital transaction management firm eOriginal's eVaulting and eClosing capabilities to its dynamic document solution, Expere. The partnership will allow Expere users to take advantage of eOriginal's digital mortgage platform.

It should also enhance the solution's electronic delivery and mortgage loan document management capabilities throughout the mortgage lending process, including securitisation, to either a MERS or non-MERS buyer. The integration is also intended to give lenders more flexibility in meeting TRID requirements and the opportunity to better serve customers based on their preferences.

CLOs

CLO equity portions evaluated

Additional expected defaults within US CLOs this year is prompting bondholders to direct greater focus to the equity portion within transaction restructurings, according to Fitch. The increasing presence of equity in the near term could arise from a combination of distress in commodity sectors and non-commodity issuers suffering from high pre-petition leverage, struggling business models and declining enterprise valuations.

Fitch explains that equity receives no credit in the calculation of a CLO's aggregate principle balance or overcollateralisation (OC) ratios, until the manager monetises the equity position. CLOs typically account for defaulted issuers either at the lower end of market value or a rating agency assumed recovery amount for the purposes of OC test ratios.

Some CLO definitions provide that an agency's recovery rate is applied in the first 30 days of a default, even if the market value rate is lower, and the 'lower of' rule applies after the first 30 days. This rule can lead to a drop in the recovery rate applied to a defaulted obligation from one reporting period to another.

CLOs

QCLO bill positives underlined

The Barr-Scott bill could pose indirect positive effects on the US CLO and leveraged loan markets by lowering the risk retention burden for managers bringing new deals to the market, Moody's reports. The bill passed the House Financial Services Committee earlier this month and now awaits potential passage in the House and the Senate (SCI 4 March).

The legislation introduces the concept of qualified CLOs, in which a CLO manager would only have to retain an amount equal to 5% of a transaction's equity tranche. As part of the arrangement, 3.5% of the retention would come in the form of equity, with the remainder coming from across the capital structure, if certain requirements are met.

Moody's says that the resulting reduced financial burden for CLO managers would likely encourage new issuance. In turn, this could add liquidity to the leveraged loan market. "It would also formalise objective credit criteria for qualified CLOs, which in turn would discourage the issuance of riskier types of CLOs," says Lana Deharveng, a Moody's senior analyst.

Further, Moody's notes that the reduced financial burden would allow less capitalised managers to comply with the retention rules and issue new CLOs, and could allow other managers to issue a greater number of CLOs without external financing. To purchase a retention interest in a US$500m CLO with a 10% equity tranche, for example, a manager's capital outlay would fall to just US$2.5m from US$25m.

However, while the proposed bill reduces the amount of the required retention piece, Moody's notes that most US CLOs already include mechanisms aligning manager and investor interests. As a result, the agency considers these developments to be credit neutral.

CMBS

REO holds foretell CMBS losses

Longer REO asset hold times could signal higher US CMBS losses, says Fitch. The average length of time REO assets spent in special servicing increased 10% last year, while REO ageing increased 16%.

A review of CMBS special servicers' REO asset inventory reveals the average time REO assets spent in special servicing increased to 42 months as of year-end 2015, up from 38 months at the end of 2014. The average time special servicers hold REO post-foreclosure increased to 22 months, up from 19.

REO inventory did, however, decline 33% since year-end 2013. This is due to improving CRE fundamentals and market liquidity.

"While partially explained by adverse selection, the increase in REO ageing remains a concern, given waning improvement in property values, the complexity and uncertainty of certain business plans, higher loss severity generally associated with extended workouts and the reduction in net recoveries given expenses and advances," says Fitch.

Although REO assets are often held after foreclosure for a time while repairs are made and leasing is stabilised before the REO sale, the agency notes that special servicers' efforts to address deficiencies and perform capital improvements can be outdone by material property value declines. With several recent examples of valuations at or near outstanding debt, the rating agency says questions must be asked about REO hold and capital improvement strategies.

Fitch will review special servicers' REO inventory during its 2016 operational risk reviews, paying particular attention to REO assets held longer than 36 months. The rating agency expects to publish a follow-up report on REO dispositions and its discussions with special servicers in 2Q16.

CMBS

Auction success for CGCMT 2007-C6

Six REO CMBS assets with a combined unpaid balance of US$55.4m, accounting for 2% of the CGCMT 2007-C6 pool, were put up for bid in online auctions last week. Kroll Bond Rating Agency research shows that all of the properties were in escrow as of 24 March, indicating that they were sold.

The agency anticipates that the assets will be liquidated in the near term for an aggregate loss amount of US$42.7m. Auctioned assets typically take between 60 and 90 days to close.

Reserve prices were met for all of the assets, except the Las Vegas Tech Center and Belvedere Apartments properties. However, an asset sale for these properties is expected, subject to the seller's final approval.

CMBS

Liquidations down, severities up

Trepp reports that 36 US CMBS loans totalling US$435.9m were liquidated in March, down from US$567m in February. Rising from US$13.2m in February, average loan size came in at US$12.1m last month.

The three largest loans that paid off in March all experienced 100% losses, two of which were backed by properties in the St Louis MSA. Comprising 35% of the total liquidation volume, the three loans are the US$77.5m St Louis Mills, US$51.8m Ariel Preferred Retail Portfolio and US$25.1m Sheraton St Louis City Center (see SCI's CMBS loan events database).

Loss severity climbed to 69.86% in March, from 33.71% in February. Last month's average loss severity is over eight percentage points higher than the previous record high.

Excluding losses of less than 2%, volume was US$402.5m, with a 75.56% loss severity.

NPLs

GACS debutant in the pipeline

Banca Popolare di Bari is set to become the first bank to launch a non-performing loan (NPL) securitisation via the Italian government's GACS guarantee scheme. The bank reportedly plans to sell up to €1bn worth of NPLs, with JPMorgan, PWC and Prelios understood to be advising on the deal.

The GACS scheme was introduced by the Italian government earlier this year (SCI 28 January). It is intended to help facilitate the transfer of NPLs from the books of commercial banks to securitisation vehicles.

Risk Management

SEC derivative rules criticised

The US SEC's proposals to cap the portfolio limits for derivatives by registered funds could harm a large number of funds and shareholders, according to a letter penned by the Investment Company Institute. The association says that the rules will stymie many funds' ability to diversify their portfolio management, forcing some to even liquidate.

The rules - outlined late last year (SCI 14 December 2015) - intend to limit the ability of funds to engage in transactions that specifically involve payment obligations, including derivatives, such as swaps. Mutual funds, ETFs, closed-end funds and BDCs would not be permitted to either have exposure to derivatives that exceed 150% of a fund's net assets or risk exposure beyond 300%.

ICI president and ceo Paul Stevens says that the association supports regulation around the use of derivatives but that even 'plain-vanilla' funds could be affected. "Nothing before the Commission or in its proposing release suggests that these bond funds are engaged in 'undue speculation' through their use of derivatives," he explains.

According to findings by the ICI, 471 funds with US$613bn in AUM would exceed the SEC's 150% notional exposure threshold. The ICI's letter further says that a fund that is unable to adjust its portfolio to the limits would be forced to de-register, which may mean the end of the fund's commercial viability and tax consequences for the fund's shareholders. Altering a fund's investment strategies to comply with the portfolio limits may also result in a fund and its shareholders incurring additional costs and risks.

As a result, the ICI is calling for the SEC to reconsider its rules on portfolio limits. If the regulator finds that the limits are still the necessary, the ICI suggests that it be used as a 'backstop' measure with modifications. This would allow funds to adjust the notional amounts attributable to derivatives based on underlying asset classes. The ICI also recommends that the exposure level be lifted to 200%, which it says it still a sustainable level for the SEC to pursue reasonable portfolio limits.

The SEC's proposals last year also set out requirements for funds to implement risk management measures to ensure stronger investor protections. The comment period for feedback on the proposals closed on Monday, the day the ICI published its letter.

Risk Management

Buy-side access model launched

Eurex Clearing is set to launch a new access model which will allow buy-side players to have a direct contractual relationship with the Deutsche Borse-owned clearinghouse. Labelled ISA Direct, the service will provide a new membership type for buy-side participants from summer 2016 onwards.

The relationship will be facilitated by a clearing agent, which will cover the default fund contribution, default management obligations and optionally certain operations and financing functions. Further, ISA Direct members will maintain legal and beneficial ownership of collateral.

The model will be originally offered for interest rate swaps and repo transactions. However, listed derivatives and securities lending transactions will follow.

"ISA Direct alleviates the regulatory requirement to centrally clear OTC derivatives in several ways," says Daniel Berner, cio of Swiss Life Switzerland. "By enabling us to become a direct member of the CCP, our concerns regarding counterparty credit risks, clearing costs and portability of our assets are much better addressed compared to the traditional client clearing model."

The model will allow clearing members to continue their operational clearing relationship with clients without requiring the traditional performance guarantee.

RMBS

AMI outlines TRID grievances

The Association of Mortgage Investors (AMI) has sent a letter to the CFPB outlining a number of concerns surrounding the regulator's TILA-RESPA Integrated Disclosure Rules (TRID), which were enacted in the second half of last year. The letter says that the rule has produced a climate of legal uncertainty, which is 'chilling' private investment.

The letter was addressed to CFPB director Richard Corday and signed by AMI executive director Chris Katopis. The AMI - which represents institutional investors in the MBS and ABS industries - says the CFPB has failed to provide sufficient clarity to originators on what comprises a good loan.

This has caused disruption in the market, which saw California origination volumes drop - particularly in November 2015 - in reaction to the rules. Moody's also highlighted late last year that there has been rampant TRID violations as originators struggle to adapt (SCI 10 December 2015). Several third-party review firms revealed to the agency that over 90% of the first pipeline of residential mortgage loans subject to TRID that they reviewed had compliance violations.

The rules are currently only affecting non-agency loans - a small portion of the market. However, the AMI predicts that agency loans could face similar scrutiny if delinquencies were to pick up.

"The GSEs at that point may decide to review TRID documentation and penalise lenders who made even small clerical errors in the disclosures," the letter reads. "Therefore, how to handle TRID errors, the ability to make corrections and how to reduce resulting liability will be issues that the industry will need to deal with in the years to come."

The CFPB has provided an informal grace period for good faith efforts for lenders to comply with TRID. However, the letter notes that this does not extend to the secondary market because borrowers may still bring a private right of action under TILA.

"Consequently, investors remain very concerned with the possible action that borrowers may bring for defects on loans that have occurred during the CFPB's grace period," the letter says.

RMBS

Countrywide trustee plan 'ratings neutral'

There will be no negative impact on ratings for Countrywide RMBS from a change of custodial file venue, says Moody's. Affected deals come from the CWABS, CWHEQ, Encore Credit Receivables Trust and GSC Capital Corp Mortgage Trust shelves. An amendment to each pooling and servicing agreement (PSA), servicing agreement (SA) and sale and servicing agreement (SSA) of various Countrywide RMBS transactions has been proposed by trustee Bank of New York Mellon to allow the trustee to maintain possession of the mortgage files in the State of Texas.

RMBS

GSE merger proposed

A paper written by key architects of the Obama administration's housing policy has been released outlining a proposal to merge Fannie Mae and Freddie Mac. The new entity would be responsible for the buying, wrapping and guaranteeing of US residential mortgages.

The authors say Fannie and Freddie are "two enormously important yet flawed institutions" which are having to "endure in conservatorship while their regulator, the FHFA, admirably helps them tread water while pleading for direction from a paralysed Congress". Their paper aims to kickstart that conversation and could help frame future debate.

The paper dubs the new institution the National Mortgage Reinsurance Corporation (NMRC) and proposes that the body would be required to sell on most of the risk of a mortgage defaulting, although it would be the government that ultimately guarantees that mortgage bonds repay on time. As a corporation, the NMRC would have more flexibility than a government agency, although the costs of making the body a privately owned mutual or utility would likely outweigh the benefits.

The paper is the work of Jim Parrott, Lewis Ranieri, Gene Sperling, Mark Zandi and Barry Zigas. Parrott formerly advised the White House on housing issues, Ranieri has a deep background in RMBS, Sperling was director of the National Economic Council for both President Obama and President Clinton, Zandi is chief economist at Moody's Analytics and Zigas is director of housing policy at Consumer Federation of America and was formerly at Fannie Mae.

The FHFA would retain its current functions, providing broad regulatory oversight of the NMRC. The new corporation would charge lower fees than the current system when investors are more willing to take on risk, but higher fees when investors are more cautious.

The proposal's expected advantages include that it would replace too big to fail with genuine competition, as no private institutions could rely on government backstopping and lenders of all sizes would have equal access. It would also be cheaper to unite the GSEs than to wind them down and start from scratch.

While there would be a new fee for the government's backing passed on to borrowers, that should be offset by lower yields on the mortgage securities. Unlike Fannie and Freddie's RMBS, the NMRC's RMBS would be explicitly backed by the full faith and credit of the US government, likely causing them to trade more like Ginnie Mae's explicitly guaranteed RMBS - ie; around 20bp lower than Fannie or Freddie RMBS.

The two main disadvantages that are foreseen concern competition and budgetary implications. For competition, the authors acknowledge that putting the purchasing, pooling, master servicing, securitising and risk syndications into a single government corporation does give up some competition, but believe other competitive advantages achieved would offset this.

Making the federal government responsible for backstopping the market would also have an impact on the federal budget. "The impact would be modest, however, since the NMRC will set its g-fee based on returns consistent with those charged by private capital. It would thus be operating consistently with how the Congressional Budget Office evaluates the risk associated with Fannie Mae and Freddie Mac's activities today," say the authors.

RMBS

Credit Suisse settles RMBS charges

The NCUA has achieved its latest settlement from a series of cases surrounding faulty pre-crisis US RMBS, as Credit Suisse has agreed to a US$29m payout. The federal agency has successfully pursued numerous securities cases against large investment banks (SCI passim), pushing its total in related legal recoveries up to US$2.5bn.

The latest case saw the NCUA represent Members United and Southwest corporate credit unions. Acting as liquidating agent and legal representative for the unions, the NCUA says that quoted payment for damages on the losses from the RMBS will include a prejudgement interest amount to be determined by a court in Manhattan that is overseeing the case.

The NCUA still has a case pending in federal court in Kansas against Credit Suisse for sales of faulty RMBS to US Central and Southwest. It also has lawsuits pending against several other firms based on the sale of faulty securities. In addition, pending litigation remains against various RMBS trustees and banks related to losses made by the credit unions.

RMBS

RMBS rating changes proposed

DBRS is requesting comments on its proposed European RMBS insight model and rating methodology. The proposed changes to its existing methodology are deemed "material" and introduce a new proprietary default model to forecast European mortgage portfolio defaults and losses.

The new model combines a loan scoring approach and dynamic delinquency migration matrices to calculate loan level defaults and losses. There is also a home price model to generate market value declines (MVD).

Jurisdiction-specific loan scoring models and dynamic delinquency migration matrices will be published for each country where the methodology will be applied for rating European RMBS. The first addendum - for Spain - has been published, and comments are also requested on this.

DBRS rates 68 classes of notes across 34 Spanish RMBS transactions. The expected impact of adopting the new methodology is expected to be neutral to positive, although a few negative rating actions are expected depending on the underlying collateral characteristics and structural features.

Comments on the new methodology are requested on or before 29 April.

RMBS

Whole loans offloaded

Rabobank has sold a €1bn portion - representing 0.5% - of its mortgage portfolio to the insurance company VIVAT Verzekeringen. The bank says that the transaction will free up capital to further strengthen its buffers, in line with its capital strategy.

Residential mortgages granted by local Rabobanks have historically been accounted for on Rabobank's balance sheet. The fact that the bank is now moving part of its mortgage portfolio off-balance sheet is related to a number of factors - additional regulations on capital requirements, the appetite of institutional investors and Rabobank's wish to continue providing mortgages and loans to customers.

At the same time, insurance companies are seeking good investments with an appropriate long-term duration. "A holding in Dutch mortgages offers an appropriate return and, with its relatively low risk profile, this mortgage portfolio is an attractive investment for VIVAT," Rabobank says.

During the term of the transaction, Rabobank will pay VIVAT all cashflows from this part of the portfolio, allowing the company to participate directly in Rabobank mortgages. The sale has no consequences for mortgage customers.

RMBS

QM RMBS loan criteria updated

Fitch has updated its criteria for analysing loans securing US RMBS under the ability-to-repay (ATR) and qualified mortgage (QM) standards adopted by the Consumer Financial Protection Bureau. The rating agency's criteria now includes assumptions for analysing pools backed by lower credit quality borrowers and programmes that do not use Appendix Q documentation standards for assessing ATR for self-employed or non-wage earning borrowers.

Fitch will double the probability of a borrower claim for lower credit quality borrowers identified either as higher priced QM or non-QM from 50% to 100% in judicial states and from 25% to 50% in non-judicial states. These assumptions may also be applied to loan programmes which substantially deviate from Appendix Q.