Contents

Structured Finance

Special forces

ABS dealer tiering emerging via departures, specialisation

Credit Suisse's recent decision to exit securitised trading in Europe highlights the reshaping of the ABS frontier that is underway across the region. Against the backdrop of regulatory pressures and capital constraints, many dealers are adopting a narrower, more specialised approach.

In its announcement, Credit Suisse said the reason for ceasing its European ABS trading operations is due to a restructuring of its long-term strategy (SCI 24 March). A number of factors are believed to have played a role in the bank's decision, including tough regulatory pressures and capital treatment squeezing its balance sheet capabilities.

"It's interesting that they are shutting up shop in Europe as a lot of their problems seem to be US-based, particularly with their CLO book," says Aza Teeuwen, partner and portfolio manager at TwentyFour Asset Management.

Credit Suisse revealed that it had also pulled back on its US CLO positions, cutting its legacy exposure from US$800m to US$300m. As the bank winds down it trading book, it leaves a significant gap in the European space.

Teeuwen recently wrote in a TwentyFour client note that liquidity would not respond positively to Credit Suisse's departure. However, he explained that the bank will probably have a small inventory to offload, including some impaired legacy assets such as defaulted CMBS.

Nonetheless, the move follows Barclays' decision last year to scale down its European ABS operations, cutting back in research, trading and sales. Uncertainty in the market suggests there is potential for more dealers to exit, but presents opportunity too.

"There is always the fear that others could leave the market or reduce their trading book," says Teeuwen. "Although regulation has made it tougher to hold ABS on a trading book, let alone to enter the market, the smaller businesses may be tempted to fill the space left open by Credit Suisse."

In its 4Q15 statements, Credit Suisse noted that its decision to put the axe to its securitisation position was part of a wider transition of its fixed income operations into a more capital-efficient broker model. As such, the move indicates a broader shift by dealers to adapt the way they handle business going forward.

"You have to remember that the cut-backs are spread across their whole fixed income spectrum, not just securitisation," adds Teeuwen. "The broker-dealer approach is certainly something we've been seeing from more banks."

Simultaneously, some dealers such as HSBC and RBC - the latter a relatively new entrant to the European ABS market - have been steadily increasing their securitisation mandate in the region over the last few years. Other dealers have responded to regulatory requirements by implementing a more specialised approach. Just as dealers are tiering by size, they are also beginning to establish reputations for handling specific asset classes.

"In 2011 to 2012, arguably everyone was doing everything in the way of dealing. You could call it an all-purpose approach," says Teeuwen. "Now the dealers are mostly categorised, targeting certain asset classes or sources of funding."

One example is Morgan Stanley, which has grown a reputation for being one of the most active dealers in mezzanine ABS. Alternatively, a number of French banks are often targeted by investors looking for value within European seniors, while Barclays' decision to cut back its European ABS mandate gave it leeway to focus more intensely on its CLO operations.

"The advantage for them is that they have become even more effective in trading CLOs and improved liquidity in the space," Teeuwen notes.

He adds that, in a way, it has also provided an easier environment for investors. A simplified hierarchy of dealers allows investors to identify each entity for their specific qualities.

"TwentyFour trades very broadly, but the benefit of dealers taking a nuanced approach is that we know who to go to for the best offers and liquidity," he concludes.

JA

Secondary markets

Euro secondary starts slowly

The quarter has begun slowly in the European securitisation secondary market.

"It's been a slow start to the week so far," says one trader. "Tone has remained positive despite the weaker macro backdrop, but clients remain on the sidelines with many still assessing the implications of the Granite Towd deal and the potential lack of future Warwick supply."

The trader continues: "Where there have been flows they have been focused around the senior part of the capital structure. We've seen some activity in prime, select peripherals and German multifamily."

BWICs too have been quiet, the trader reports. "There have been a few asset managers selling here and there, but nothing major."

That pattern looks set to continue today where there are currently five BWICs on the European schedule. Four are single lines of Spanish RMBS, CDO, CMBS and UK RMBS and the fifth involves four single-B CLO tranches totalling €14.61m

The latter is due at 14:30 London time and comprises: CGMSE 2013-2X E, CORDA 3X F, HARVT 8X F and JUBIL 2014-14X F. None of the bonds has traded on PriceABS in the past three months.

Secondary markets

US CLO change ahead?

The recent quiet period in the US CLO market could be about to change.

"The lull is continuing for now, but it is just that - a lull," says one trader. "Things are about to change and get very interesting."

The trader continues: "Volatility is low again across wider markets and CLOs have tightened significantly. I believe there is now a significant US CLO pipeline and expect to see quite a few new deals announced in the next couple of weeks."

That new issuance will, in turn, impact secondary, the trader suggests. "Spreads narrowing shows that money has been raised and is already being put to work, but primary supply will limit further tightening."

There are six BWICs on the US CLO calendar for today so far. The line items almost exclusively involve 2.0 mezz and the largest list is no exception.

Due at 11:00 New York time the 10 line $43.219m triple- to single-B list comprises: AMMC 2013-13A B2L, CAVY 2013-3A D, CIFC 2014-3A E, CRMN 2014-2A D, FLAGS 2013-7A E, HLDN 2015-4A D, NOMAD 2013-1A D, SPARK 2014-1A F, SPARK 2014-1X F and TRAL 2014-3A E. None of the bonds has covered with a price on PriceABS in the past three months.

Secondary markets

Euro secondary patchy

There is something of a pick-up in the European securitisation secondary market but activity remains patchy.

"It's getting more active, but we're not yet back to where we were before Easter," says one trader. "Trading is still selective rather than widespread."

The trader continues: "We've seen a few trades in UK prime, which went wider last week but has come back in this. So it seems investors are comfortable with the Brexit position at least in the context of UK RMBS."

Other prime areas remain quieter, the trader notes. "There's not much happening in autos, for example, even though primary is picking up there."

Peripherals are faring slightly better. "Market tone is relatively constructive and we're seeing a number of enquiries in Portuguese and Spanish paper," says the trader. "Portugal in particular is a little stronger since a BWIC in that sector went well on Monday."

Meanwhile, the trader reports: "CLOs have stabilised after the recent tightening. We're seeing a strong client bid for triple-As, but what little BWIC activity there is focuses on mezz where spreads remain firm - the bonds that traded on yesterday's single-B list went through in the low 1,000s."

Overall, the BWIC calendar remains light today with four BWICs on the European schedule so far. The largest auction once again involves CLO mezz, albeit involving 1.0s this time.

The ten line €45.09m list is due at 15:00 London time and comprises: AVOCA VIII-X D, AVOCA VIII-X E, CADOG 3X E, EGLXY 2007-2X D, EGLXY 2007-2X E, EV7 1-X E1, HARBM 9X E, MSIMC 2007-1X E, OHECP 2007-2X E and RMFE V-X V. None of the bonds has covered with a price on PriceABS in the past three months.

Secondary markets

US CLOs stay strong

The strong tone in the US CLO secondary market is showing no signs of diminishing.

"The secondary rally continues to strengthen - this wave now really seems to have some power to it," says one trader. "After significant tightening in recent weeks we've seen no fading of the bid this week."

The trader continues: "Quality bonds are still being bid strongly and taken tighter. That is even evident in paper that doesn't change hands, for example there was some MDPK 2013-11A E on BWIC yesterday that didn't trade even though the seller got bids around an 850DM - he obviously believes there'll be a lot nearer 800 in a week or so."

Indeed, that part of the stack is still at the forefront of the rally for now. "Mezz is still leading but the rest of the stack is tighter," says the trader. "Equity is currently lagging, but once this double-B run hits 7-8% yield, we'll see the lower piece start to pick up faster."

Overall, headline BWIC volumes are down, but that doesn't mean activity has dropped significantly the trader says. "A higher percentage of BWIC paper is trading - we're up to around 95% of line items at the moment - and there's a lot more going on out of comp."

The demand driving such activity is likely to remain strong, the trader suggests. "There's no obvious fundamental catalyst to reduce the appetite for CLO paper and technicals are also encouraging the herd mentality - loans are improving, high yield is coming in and spreads are tightening across the rest of structured credit."

At the same time, secondary CLO liquidity has deepened, the trader notes. "Liquidity has improved because of new players coming in as well as existing investors having increased cash to put to work, while those who were held back from trading in March by February marks being made in a bubble are now in a much better position. So, overall I expect a lot more secondary activity this month."

There are currently five BWICs on today's US CLO calendar. The largest is a $35.55m seven line collection of 2.0 single- and double-Bs.

Due at 13:00 New York time it comprises: DRSLF 2014-31A E, GOLD8 2014-8X E, HLDN 2013-1A E, MDPK 2014-13X E, OZLMF 2013-4A D, SNDPT 2014-2A F and WELF 2015-1A F. Only DRSLF 2014-31A E has covered with a price on PriceABS in the past three months - at 65.27 on the 8 March.

Structured Finance

ABS platform to host loan auction

Securitisation platform Ldger is set to host the first live auction of marketplace loans on 6 April. The auction will comprise of several Prosper whole loans with a total value of under US$500,000.

Ldger believes that the marketplace lending industry currently suffers from a lack of liquidity, which is something it seeks to correct through initiatives like this auction and particularly its securitisation model. Hyung Kim, Ldger co-founder and ceo, states: "At the moment, there is a lack of liquidity in the space and investors are having to hold loans to maturity - this is holding the industry back. We feel we can address this shortage of liquidity, partly through the securitisation platform we have developed and which we hope over time to also build into a functioning secondary market."

The auction will consist of standard, well-performing Prosper loans, only 2-3 weeks in age. Kim says that the "quality or type of loan that is auctioned may change over time, but it's hard to say now as that will be determined by demand within the market."

To support the case for a secondary market, several investors have rallied behind the auction and registered well in advance. Kim states that those already registered are "all eager to test the process of the auction to see how the process works and also to show their support for the idea."

Ldger also emphasises that while this auction will consist of consumer loans, it intends to work with other marketplace loan types in terms of its ABS modelling process.

Kim concludes: "In terms of the securitisation process, we certainly see ourselves working within different marketplace lending verticals, such as SME, student loans and more."

RB

Structured Finance

SCI Start the Week - 4 April

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

Pipeline
The week following Easter marked a slow-down in the pace of deals joining the pipeline. At the last count there were six ABS and a single CMBS.

US$1bn AmeriCredit Automobile Receivables Trust 2016-2, US$300m DT Auto Owner Trust 2016-2, €400m FCT Eurotruck Lease III, US$438m Hyundai Floorplan Master Owner Trust Series 2016-1, US$575m Sonic Capital 2016-1 and €742.5m VCL 23 accounted for the ABS. The CMBS was US$550m SBL Commercial Mortgage Trust 2016-KIND.

Pricings
A large number of deals did leave the pipeline, however. As well as five ABS prints there was also an ILS, four RMBS, two CMBS and four CLOs/CDOs.

The ABS were: US$510m Apollo Aviation Securitization Equity Trust 2016-1; US$450m Avis Budget Rental Car Funding Series 2016-1; US$699m Chesapeake Funding II Series 2016-1; €717.5m FCT Ginkgo 2015-SF1; and US$750m Ford Credit Floorplan Master Owner Trust A Series 2016-2.

US$175m Aozora Re 2016-1 was the ILS. The RMBS were US$326m Agate Bay Mortgage Trust 2016-2, US$1.89bn Chase Mortgage Trust 2016-1, €7.679bn Dolphin Master Issuer 2016-1 and US$772.75m Towd Point Mortgage Trust 2016-1.

US$771m CGCMT 2016-P3 and US$818m DBJPM 2016-C1 were the CMBS. The CLOs/CDOs were €1.171bn Berica PMI 2, US$451m Canyon CLO 2016-1, €412m Harvest CLO XV and US$347.5m Trust Preferred Insurance Note Securitization 2016-1.

Markets
US CMBS spreads have rebounded strongly, having widened 33bp during the first part of 1Q16 and then tightened 43bp to finish the quarter at swaps plus 130bp. Citi analysts attribute the rebound to lower supply expectations and the Fed's dovish interest rate stance. The analysts have cut their issuance expectation to US$65bn-US$70bn, and as investors have also readjusted their expectations, demand for recent offerings has increased.

The European ABS and RMBS markets were quiet in the holiday-shortened week. BWIC volumes were muted while JPMorgan analysts note that "sentiment around the product continued to improve as investors were opportunistically looking for yield". Portuguese RMBS spreads tightened around 5bp last week, with Spanish and Italian spreads tightening 1bp.

Editor's picks
Trust issues: The US CMBS market has encountered a rocky start to 2016, with new issue pricing spreads performing unpredictably. A number of other concerns have cast doubt over profitability on the origination side, prompting suggestions that lenders may slowly thin out...
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...
US CLOs still strong: The US CLO secondary market looks set for a quieter day today (31 March), 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."

Deal news
• 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.
• 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.
• 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.

Regulatory update
• 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 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.
• 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.
• 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 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 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.

Deals added to the SCI New Issuance database last week:
Akibare Re Series 2016-1; Aozora Re series 2016-1; Atlas IX Series 2016-1; Caelus Re IV series 2016-1; CAS 2016-C02; CGCMT 2016-P3; COMM 2016-787S; Dolphin Master Issuer series 2016-1; E-CARAT 6; Espada Reinsurance Series 2016-I; FCT Ginkgo Compartment Sales Finance 2015-1; Golub Capital Partners CLO 30(M); Manatee Re Series 2016-1; Molineux RMBS 2016-1; Pepper Residential Securities Trust No. 16; WFCM 2016-C33

Deals added to the SCI CMBS Loan Events database last week:
BACM 2006-6; CGCMT 2013-GC15; COMM 2012-CR3; COMM 2013-CR9; COMM 2014-CR15; COMM 2014-CR19; COMM 2014-LC17; COMM 2014-UBS6; GSMS 2011-GC5; GSMS 2013-GC10; GSMS 2014-GC20; Logistics 2015 UK; TAURS 2006-1; TITN 2006-2; TMAN 5; UBSBB 2013-C6; WFRBS 2013-C11; WFRBS 2013-C13 & WFRBS 2013-C14; WFRBS 2013-C14; WFRBS 2013-C15; WFRBS 2013-UBS1; WFRBS 2014-C22

Structured Finance

STS alarm bells ring

A list of potential pitfalls in the European Commission's STS framework has been published in a letter by 32 signatories, including some of the EU's largest banks. The signatories argue that the STS framework would not, in its current form, provide the solution for the securitisation market that it is intended to.

The joint-letter seeks to address 10 key points on which there is a broad consensus as to STS framework failings and as to what can be done to fix them. The signatories stress that other problems also remain.

The signatories "fully support the new regulations already implemented in Europe in the last several years", such as skin in the game, regulations on transparency and disclosure, and regulations on due diligence, they say. They also note that the European Commission's STS and CRR proposals "identify the right lessons from the crisis and are a welcome starting point for re-invigorating a key funding channel for Europe's economy", but believe the proposals are lacking essential components which must be added for the securitisation market to function properly.

Of the 10 key points highlighted, the first is that many criteria remain vague or unnecessarily prescriptive. For example, the drafting of the criterion excluding defaulted receivables would capture credit card securitisation, where a small portion of assets fall within the technical, but not practical, definition of default.

The criterion to exclude credit impaired borrowers would also catch many well-performing asset classes such as car finance and SME equipment finance. To fix issues such as these, the signatories call for amendments such as placing a "reasonable low limit on the percentage of securitised assets that fall out of the rule", as well as a careful examination of the individual STS criteria and additional CRR criteria to remove uncertainty.

Second, the signatories believe the lack of grandfathering provisions for STS and retention will cause unwarranted market dislocation. While many existing securitisations would substantially conform with STS criteria, very few would do so fully, so investors may therefore be forced into divestments. To avoid this situation the signatories say simple, short-form rules should be introduced for existing securitisations that are fundamentally STS to be treated as such.

Third, the lack of a holistic approach for investor due diligence makes life difficult for investors seeking to invest in STS. To fix this, STS rules should be aligned with those of other simple and transparent products and end investors should be able to delegate due diligence to asset managers - which is currently prohibited - to avoid the same due diligence being carried out multiple times.

Fourth, while originators and sponsors should attest to STS compliance and be sanctioned for fraudulent failures, the signatories note that they should only be held accountable for what they know and control, rather than for the entire issuance. Fifth, the signatories call for the authorities to appoint and regulate independent bodies to issue certifications of STS compliance.

Sixth, the fact that the STS framework's 55 criteria will each be interpreted by various national regulators risks fragmenting the single market for STS securitisation before it has even begun. The suggested solution is to establish a single point of interpretation, which would either be an existing regulatory body or a college of such regulatory bodies.

The seventh point concerns maturity caps on underlying exposures and disproportionate public disclosure requirements for ABCP which do not match investor needs. The 32 parties call for the maturity cap on assets for STS ABCP programmes to be omitted or substantially extended, and for disclosure requirements to be changed.

Eighth is that the proposed revisions to the CRR capital framework remain a major disincentive for banks holding or originating STS securitisations. The capital calibration should therefore accurately take into account the benefit of STS, not least by ceasing the double-counting of maturity risk in SEC-ERBA and by allowing European banks to use proxy data to estimate credit risk more effectively, as is already proposed by Basel.

Ninth, the severe consequences of securitisations losing STS status as a result of ex post facto changes risks creating a very unstable system. Reasonable and safe regulatory mitigants would therefore be welcome and it is suggested that minor non-compliance with STS criteria that has no material impact on a securitisation should not lead to the de-classification of that securitisation.

Finally, the tenth point relates to the urgent need to complete the STS project by adding those remaining parts of the construction. This will require changes to the capital calibrations for insurance companies under Solvency 2, modifications to the rules on liquidity coverage ratio eligible assets under CRR and modifications to ensure that assets securitised in transactions meeting appropriate criteria are excluded from the calculations of bank assets for leverage ratio purposes.

JL

NPLs

China NPL rules mooted

Chinese authorities are pushing to incorporate NPLs as a fully-fledged product within the country's growing securitisation market. The National Association of Financial Market Institutional Investors (NAFMII) is leading the initiative with a new set of guidelines for an NPL framework, which were opened for feedback last month.

The rules reflect NAFMII's standard ABS guidelines and are split into two sections. However, the NPL framework focuses particularly on disclosure details.

"The rules have disclosure requirements for the closing stage of an NPL transaction and then a separate set of criteria for the post-closing stage," says Jerome Cheng, svp at Moody's. "There is a higher disclosure standard for the asset pool, such as the valuation method of the underlying NPL. Investors can identify some more granular details on the underlying assets."

Among the details the issuer must provide are the characteristics of the NPL and the cashflow forecast. Cheng notes that the originator and other relevant transaction parties are also required to provide details on their background, including their experiences in NPL securitisation and data history.

"Combining these details is important for investors," adds Cheng. "The education process is important for international investors to be comfortable with the risks in the NPL securitisation. The proposed guideline requires a greater minimum level of transparency in future transactions."

The consultation ran from 24-28 March, leaving a tight window for feedback on the proposals. However, it remains unclear when the guidelines will be rolled out by the regulator.

"If you were to go by previous consultations, NAFMII released the auto ABS (SCI 22 October 2015) and RMBS guidelines into action quite swiftly," says Chen Xue, analyst at Moody's.

The move by NAFMII comes in light of recent reports around numerous attempts to ignite NPL activity in the Chinese ABS market. Among these developments, the Chinese government is understood to have provided a mandate for six domestic banks to issue up to CNY50bn of ABS backed by NPL assets.

JA

RMBS

Granite resurfaces in unique RMBS

Cerberus European Residential Holdings is bringing to market a deal which is essentially a refinancing of the Granite portfolio it bought late last year (SCI 13 November 2015). Towd Point Mortgage Funding 2016-GR1 is the largest new issue in its sector since before the financial crisis, which is seen as widely positive for UK non-conforming RMBS, particularly so close to the Brexit referendum.

The deal is structured as a pass-through RMBS structure at a reported size of £6.2bn. The majority of the assets are being transferred from the Neptune Rated and Unrated warehouse facilities that Cerberus set up following its move to acquire the Granite portfolio (SCI 16 November 2015).

The class A floating rate senior notes comprise the bulk of the deal at over £4.7bn. The notes have been provisionally rated triple-A by Fitch, S&P and Moody's.

Guidance for the senior tranche is set at Libor plus 118bp. The bulk of the deal is understood to be pre-placed, especially higher up the stack. All the notes in the pool have a final maturity date of July 2046.

The deal is also unique is that it is the first UK RMBS transaction to include a net weighted average coupon (WAC) cap feature. The cap means junior note investors will only be paid a coupon at the lower of the stated margin over Libor and the net income earned on the assets, so they may not be paid the stated margin on the notes. The class A notes are not subject to the net WAC cap.

The deal is expected to price on Friday (8 April).

JA

Structured Finance

SF pro joins Greenberg

Greenberg Traurig has brought in a number of attorneys from DLA Piper, including structured finance professional Dania Duncan. She becomes a shareholder in the firm and will be based in its Dallas office.

Duncan's practice comprises commercial, industrial, and residential real estate matters, including development and acquisitions, structured finance and corporate matters. She has significant experience representing international and US companies in all aspects of CRE transactions. In addition to being a partner at DLA Piper, Duncan has also been an associate at Thompson & Knight.

Structured Finance

Credit alternatives pro hired

Angel Oak Capital Advisors has recruited Manish Valecha as head of institutional alternatives. He will lead the company's efforts in the institutional investor marketplace with pensions, consultants, endowments, foundations and family offices.

Valecha will primarily focus on marketing, product development and institutional due diligence. Prior to joining Angel Oak, he was head of research at Gapstow Capital Partners, focusing on hedge funds, private equity funds, CLOs and community banks. Valecha's experience also includes roles at BlackRock, Barclays, Ziff Brothers Investments and Merrill Lynch.

Structured Finance

Private credit exec poached

Walt Jackson has joined Onex Credit to establish a direct lending platform. He has thirty years of experience in the leveraged loan, high yield and mezzanine markets, most recently as coo of the private credit group at Goldman Sachs' merchant banking division.

Structured Finance

Capital markets unit adds DCM director

Macquarie Capital has appointed Warrick Booth as md in its European debt capital markets team. He will be based in London and report to Sam Newman, head of European DCM, and Stephen Mehos, head of US DCM.

Booth will lead the syndication of debt and structured equity. He has over two decades of experience in investment banking and has held senior roles in structured trade finance, leveraged finance, syndication and high yield at CIBC World Markets and RBC Capital Markets. He was most recently at ANZ Bank New Zealand.

Structured Finance

Distressed research head named

SC Lowy has appointed Miles Tadman head of research - Europe. Based in London, he will be responsible for expanding research coverage to support SC Lowy's fast-growing European business. Tadman previously led the distressed analyst teams at Barclays and Deutsche Bank.

Structured Finance

Structured credit head recruited

JLL has expanded its specialist investment services capabilities with the appointment of Ben Roger-Smith as head of structured products for the EMEA region. Based in London, he will report to Chris Holmes, lead director for EMEA debt advisory at the firm.

In this newly created role, Roger-Smith will be responsible for developing JLL's comprehensive structured credit platform. He will work alongside the firm's M&A, funds advisory and investment sales and acquisition experts to ensure that clients benefit from its access to global capital and knowledge of the real estate asset class.

Roger-Smith joins JLL from Finn Square Capital and previously spent 15 years at HSBC as part of its global structured finance team responsible for the origination, structuring and distribution of ABS. He has raised over US$30bn of asset-backed debt and developed a number of first-time funding platforms across a wide variety of asset classes, including RMBS, CMBS, whole business securitisation, future flow and infrastructure PFI/PPP.

Structured Finance

CRM sold to management team

Banc of California has agreed to sell The Palisades Group to Palisade Holdings I, which is owned by current members of the Palisades management team - led by ceo Stephen Kirch and cio Jack Macdowell. The Palisades Group is an investment advisor specialising in residential credit, which also serves as a securitisation credit risk manager.

Banc of California has sanctioned the sale as part of its strategy to refocus primarily on its commercial banking activities. The transaction will see it receive a mix of cash, a two-year promissory note and an earn-out tied to the future success of Palisades. The deal is expected to close this quarter and to be accretive to the company's 2016 earnings.

"This transaction positions Palisades as the leading independent credit manager overseeing portfolios of performing, re-performing and non-performing residential mortgage loans," says Kirch. The deal allows the management team to inherit the subsidiary's credit risk management experience in overseeing securitisation transactions.

Palisades will continue to provide advisory and credit management services to Banc of California following the closing of the deal. Banc of California expects to update investors on additional details surrounding the transaction during its first quarter earnings call.

CDS

CDS pro shifts law firms

Mayer Brown has added Douglas Donahue as a partner in its New York Office. He will contribute to the firm's global banking and finance practice, as well as its derivatives and structured products group.

Donahue's practice focuses on transactional and advisory matters related to derivatives. He represents both buy- and sell-side institutions in connection with the development, structuring, negotiation and documentation of a wide variety of financial products, including CDS.

Prior to his move, Donahue was special counsel at Cadwalader, Wickersham & Taft.

CDS

Derivatives lawyer added in LA

Seyfarth Shaw has appointed Gordon Peery as a partner in Los Angeles. He will serve as chair of its derivatives practice and as a member of its real estate practice.

Peery's expertise is in derivatives and structured finance. He was previously at Borden Ladner Gervais, where he was global derivatives advisor, and has also worked at K&L Gates and Dechert.

Structured Finance

Brexit set to dampen CRE

The UK's impending referendum on whether to remain in or exit the EU could dampen prospects for the jurisdiction's real estate sector, says S&P. The agency notes that while the long-term impact would depend on how the exit is negotiated, uncertainty could add to capital market volatility and create negative sentiment for real estate investment.

"Uncertainty leading up to the 23 June vote is likely to have a somewhat paralysing effect on investor decisions on UK real estate purchases," says S&P credit analyst Marie-Aude Vialle. "Should the country decide in favour of a Brexit, prolonged uncertainty during the subsequent exit negotiations may turn investor sentiment more negative."

This could potentially reverse the significant boost to real estate asset values that the UK, and London in particular, has experienced in recent years. Financial services firms, already under pressure to contain costs, may find an additional reason to reduce office space in London.

Consequently, S&P considers the risks of Brexit to the real estate sector may be most pronounced in the commercial real estate sector, particularly in the office segment. The effects will be more concentrated in London, with the City of London being hardest hit because of a high concentration of international financial services firms. The agency nevertheless notes that rated large UK CRE companies currently have a large degree of cushion in their loan-to-value ratios, should property valuations drop.

"The greatest impact of a Brexit on CMBS and RMBS would also be felt in London real estate and, specifically, the office sector," comments S&P credit analyst Soniya Patel. More than 40% of securitised UK real estate and over 95% of all securitised UK office properties are located in London.

For RMBS bonds, Brexit may impact house prices - primarily in London and the South-east - and could cause ratings to be reviewed, especially those of deals with larger concentrations in the affected areas. "Similarly, we may need to review CMBS bonds with significant exposure to London real estate in the event that Brexit affected commercial real estate values," adds Patel.

Structured Finance

Synthetic securitisation seminar planned

The EBA and the European Investment Bank Group are set to jointly host a seminar on 31 May to discuss opportunities and challenges surrounding the role and potential use of credit guarantees and synthetic securitisation in the banking sector. The aim of the seminar, which will be held at the EBA premises, is to provide a forum for discussing the current status and potential ways to address regulatory and supervisory aspects of this area. Interventions from the European Commission, industry stakeholders, the EIB, the EIF and the EBA are expected to stimulate the discussion.

CDO

Trups CDO cap introduced

Fitch has updated its rating criteria for Trups CDOs with the introduction of a performing credit enhancement (CE) cap. The impact of the update is expected to be limited to three transactions that could be downgraded by a notch in the absence of offsetting collateral improvements and deleveraging since the agency's last review.

Fitch says that the application of a performing CE cap aims to provide consistency in the levels of performing collateral coverage for notes rated in the same category, given a relatively homogeneous nature of underlying collateral and credit quality.
Additionally, the agency has revised its analytical framework for portfolios with mostly bank collateral and will no longer apply its portfolio credit model (PCM) to such portfolios. Instead, the rated portion of the collateral will be analysed based on corporate probability of default assumptions and multipliers.

The other change in the criteria update incorporates the likelihood of re-deferrals into Trups CDO analysis for issuers that have cured in the past 12 months. Fitch says it has observed an emerging trend of issuers curing a previous deferral and then re-deferring. The agency will assume that 15% of recent cures (within the first year since curing) can re-defer and will be considered weak deferrals at that point.

The impacted CDOs will be reviewed in the near-term as part of Fitch's sector review.

CDS

Pacific CDS settled

The final price of Pacific Exploration & Production Corp CDS has settled at 20 (SCI 24 March). At an auction held on 6 April, 11 dealers submitted initial markets, physical settlement requests and limit orders to settle trades across the credit derivatives market referencing the entity.

CDS

CDS blockchain test completed

The DTCC, Markit and Axoni have joined four banks in completing the first successful test trade of single name CDS through the use of blockchain technology. The banks were Bank of America Merill Lynch, Citi, Credit Suisse and JPMorgan.

In early March, the participants conducted 85 structured test cases to assess a number of aspects, including lifecycle functionality, integration with external systems, network resiliency and data privacy. The implementation achieved a 100% success rate across all tests.

The group used the project to establish a blockchain trade processing network using Axoni software. CDS was chosen for the initiative due the variety of lifecycle events that apply to the product.

In the test, Markit generated smart contracts from CDS trade confirmations. The contracts had economic terms embedded in, as well as computational logic to manage permissions and event processing. The contracts demonstrated the potential transparency of a deal, as it included individual trade details, counterparty risk metrics and systemic exposure to each reference entity.

Brad Levy, md and head of Markit's process division, notes that the success of the initiative reinforces its commitment to use the technology for CDS and other asset classes. The DTCC recently announced that it has teamed up with Digital Asset Holdings to develop a distributed ledger solution, which would see the clearing and settlement of US Treasury, agency and agency RMBS repo transactions (SCI 31 March).

CLOs

CLO indices increase eligibility

Palmer Square Capital Management has announced a methodology change to its Palmer Square CLO Senior Debt Index (CLOSE) and the Palmer Square CLO Debt Index (CLODI). The update is effective from the latest rebalance of the indices on 31 March.

CLOs eligible for inclusion in CLOSE now include deals that are larger than US$500m (previously US$600m). Additionally, CLOs eligible for inclusion in CLODI now include deals that are larger than US$400m (previously US$500m).

"Especially in light of the recent sell-off, many investors are investing in and beginning to analyse CLO debt, due to its relative value, floating rate nature and historically low default rates," comments Christopher Long, president of Palmer Square Capital Management. "Before the launch of these indices in 2015, the broad market of CLO investors - which spans from insurance companies to family offices - did not have access to a daily performance benchmark, so we are pleased to provide them with the data which we believe will help them to make smarter investing decisions."

The indices are rules-based observable pricing and total return indices for US dollar-denominated CLO debt. CLODI comprises tranches rated single-A, triple-B or double-B at the time of issuance, while CLOSE comprises triple-A and double-A rated tranches.

CMBS

CMBS default drop to stop

US CMBS loan defaults fell again in 2015 but the trend is likely to stop this year, according to Fitch. Term defaults are expected to tick up slightly in 2016 after dropping for a fifth straight year in the sector.

Fitch says the end of the streak will come as the current credit cycle matures. Defaults peaked at 4.1% in 2010, which has now dramatically fallen to an annual default rate of 0.4%.

"CRE markets had another good year in 2015 as the economy continued to grow, healthy new issuance volume provided ample liquidity and new construction remained generally muted," says Fitch senior director Brook Sutherland.

In total, 181 loans defaulted with a balance of US$2.7bn in 2015. This compares to 294 loans totalling US$3.9bn in 2014 and 353 loans totalling US$5.4bn in 2013. Peak vintages once again drove defaults, with 2005-2007 loans accounting for nearly 88% of the total.

Fitch notes that many problem loans originated during the previous peak have already defaulted. However, maturity defaults are set to increase over the next few years as peak vintage loans - many of which are over levered - mature.

The cumulative default rate in 2015 fell to 13% from 13.3% in 2014. A rise in defaults in 2016 could also come from CMBS 2.0 loans beginning to default at a higher rate and new issuance volume declining.

Office emerged as the default leader again in 2015 after retail was the main culprit in 2014. Office defaults came to 64 loans at a total of US$1.4bn, or 53% of defaults. This compares to 86 office defaults that totalled US$1.2bn in 2014 and 141 office loans totalling US$2.6bn in 2013.

CMBS

Delinquencies inch up

The US CMBS delinquency rate stood at 4.22% in March, an increase of 7bp from February, according to Trepp. The rate is 136bp lower than the year-ago level.

CMBS loans that were previously delinquent but paid off with a loss or at par totalled over US$700m last month. Removing these previously distressed assets from the numerator of the delinquency calculation helped move the rate down by 15bp.

Over US$600m in loans were cured, which helped push delinquencies lower by another 12bp. However, about US$1.7bn in loans became newly delinquent, which put 33bp of upward pressure on the delinquency rate.

The percentage of loans that are seriously delinquent is now 4.06%, unchanged for the month. Excluding defeased loans, the overall 30-day delinquency rate is 4.44% for March.

There are currently US$21.2bn in delinquent loans. This figure excludes loans that are past their balloon date, but are current on interest payments.

CMBS

CMBS pay-offs jump

The percentage of US CMBS loans that paid off on their balloon date jumped last month to 75.3%, nearly 10 points higher than the February level, according to Trepp. The March tally is well above the 12-month moving average of 69.3%.

By loan count as opposed to balance, 66.5% of loans paid off last month. On this basis, the pay-off rate was below February's level of 73.2%.

The 12-month rolling average by loan count is now 69.3%.

CMBS

Data tool expands to CMBS

Actovia is branching out its data coverage to encompass the US CMBS market through a new tool. The tool will provide names and contact details for properties with CMBS mortgages, which can be sourced at both a national or regional level.

The company says the platform has been launched in light of the sector's incoming maturity wave (SCI passim) and will provide a greater level of specificity than rival services. Brokers using the platform will have access to direct contact with owners, as opposed to generic information.

The service also includes various details of the mortgage, including information on loan amount per square foot and LTV ratio. Further, there are details on lender information, prepayment penalties and loan origination date.

Insurance-linked securities

Parametric pricing app launched

Risk Management Solutions (RMS) has launched a new cloud-based app that provides the ability to assess and underwrite parametric contracts linked to ILS and reinsurance contracts. RMS Cat-in-a-Box gives a simplified means to assess namesake contracts, which provide cover for a particular type of catastrophe with a given geographical boundary.

The niche nature of such contracts are often used by corporates looking for quick and effective protection. With parametric deals, the terms of the contract are triggered by the location and parameters of the catastrophe - for example, maximum wind speed or the storm category - rather than losses incurred by it. This allows for a quick decision to be made on whether a contract is triggered.

Users of the app can adjust the geographic area and change hazard parameters to produce instant key risk metrics and exceedance probability curves. RMS capital markets director Stephen Moss adds that he expects parametric deals to increase in 2016 in light of the app, and particularly as the market edges towards hurricane season.

Risk Management

Mixed impact from 'step-in' proposals

Basel Committee proposals could increase capital charges for banks with large asset management activities. Moody's says that the proposals on step-in risk are credit positive for senior bank creditors, but could also make asset management less attractive due to increased operational costs and capital requirements.

As part of a broader regulatory push to tackle shadow banking risk, the Basel Committee is proposing rules to identify and assess banks' exposure to the risk that they may provide financial support to unconsolidated financial entities at times of market stress. Banks with substantial asset management subsidiaries may be particularly exposed to this so-called step-in risk.

Banks sponsor around US$1.1trn in managed assets out of the top 10 US and EU money market funds. Therefore the additional capital requirements could be substantial.

Risk Management

Leverage ratio changes proposed

The Basel Committee has released a consultative document on revisions to the Basel 3 leverage ratio framework, as well as responses to a third set of FAQs. The consultative document's proposals are the result of feedback from market participants and stakeholders and cover four key issues.

The committee is proposing to use a modified version of the standardised approach (SA-CCR) for measuring derivative exposures, rather than using the current exposure method (CEM). Additionally, to ensure consistency across accounting standards, the proposals put forward two options for the treatment of regular-way purchases and sales of financial assets.

Also proposed is clarification of the treatment of provisions and prudential valuation adjustments for less liquid positions, to avoid double-counting. Finally, the proposals also include alignment of the credit conversion factors for off-balance sheet items with those proposed for the standardised approach to credit risk under the risk-based framework.

Comments on all aspects of the proposals are welcome before 6 July. The committee is also seeking comment on an additional leverage ratio requirement applicable to global systemically important banks.

Risk Management

CVA consultation launched

The EBA has launched a public consultation on draft amending regulatory technical standards (RTS) on credit valuation adjustment (CVA) proxy spread, which aim to ensure a more adequate calculation of own funds requirements for CVA risk. The RTS propose limited amendments to the European Commission's Delegated Regulation (EU) No 526/2014 based on two policy recommendations contained in the EBA's CVA report published on 25 February 2015.

On 20 December 2013, the EBA published the RTS on CVA risk to determine a proxy spread and specify a limited number of smaller portfolios for the Capital Requirements Regulation (CRR). In the CVA report published on 25 February 2015, the EBA re-assessed the relevance of the RTS provisions, in particular based on a CVA data collection exercise involving 32 banks from 11 jurisdictions. The CVA report showed persistent difficulties in determining appropriate proxy spreads for a large number of counterparties.

Against this backdrop, policy recommendations 7 and 8 of the CVA report concluded that the RTS should be amended to address the difficulties associated with the determination of proxy spreads for large numbers of counterparties, for which spreads may never be observed on markets, as well as issues linked with LGDMKT. Therefore, the amending RTS propose to further specify cases where alternative approaches can be used for the purposes of identifying an appropriate proxy spread and LGDMKT. The move is expected to result in a more adequate calculation of own funds requirements for CVA risk, including in some cases a reduction of own funds requirements, thus partially remedying the over-estimation of current own funds requirements for counterparties in the scope of the CVA risk charge in the EU.

The consultation runs until 6 July. A public hearing will take place at the EBA premises on 23 May.

RMBS

Countrywide initial releases identified

A severance order and partial final judgment was last week filed in the New York State Supreme Court that would permit allocable shares under the Countrywide RMBS settlement to be distributed to 515 'initial release trusts'. The remaining 15 transactions - 12 CWALT and three CWHL deals - involved in the case continue to be contested.

The order would release US$8bn of the US$8.5bn settlement to non-agency RMBS investors, according to Morgan Stanley RMBS analysts. They add that the reinvestment implications of the move are a "strong positive", not only for the non-agency space, but also for securitised risk assets in general.

"The question comes down to timing, as it has with this Countrywide settlement since June 2011," the Morgan Stanley analysts observe. "The order still needs to be signed by the Court and entered by the clerk. Irrespective of the date on which both of those actions occur, it needs to appear publicly on the New York State Court Electronic Filing System for the 'judgment entry date' to have occurred."

The 'transfer month' will then be defined as the month of the judgment entry date, provided that it occurs on or before the fourth calendar day of the month. Otherwise, it will be deemed to be the subsequent month.

RMBS

California AG targets RMBS

The California Attorney General Kamala Harris has filed a lawsuit against Morgan Stanley over RMBS that it allegedly misrepresented when selling to California public pension funds. The complaint  was filed in the San Francisco Superior Court. The funds lost millions of dollars on the RMBS investments.

"Morgan Stanley's conduct in this case evidenced a culture of greed and deception that helped create a devastating economic crisis and crippled California's budget," says Harris. The California Public Employees Retirement System and the California State Teachers Retirement System are the funds represented in the Attorney General's lawsuit.

The suit alleges that Morgan Stanley violated the False Claims Act, the California Securities Law and other state laws by concealing or understating the risks of large, complex financial transactions. In addition to RMBS, the complaint also focuses on SIVs which packaged other forms of debt.

The assets were assembled and sold between 2004 and 2007, many of which contained allegedly risky loans made by Morgan Stanley subsidiary Saxon. New Century, a mortgage lender which received crucial funding from Morgan Stanley, was also involved in the formation and sale of the assets.

According to the filing, Morgan Stanley purchased and bundled high risk loans from subprime lenders into seemingly safe investments. This was allegedly done in spite of the bank's awareness that the lenders were "not [using] a lot of common sense" when approving the loans.

Morgan Stanley is also accused of not disclosing the risks because it did not want its concerns about loan quality to become a 'relationship killer' in its lucrative business with the lenders. The offering documents that it provided therefore apparently failed to disclose details of underwater or delinquent loans.

The complaint also alleges that Morgan Stanley sometimes even took loans that it had already decided not to include in its investment packages because they were too risky, and then included them in later investment packages. The lack of disclosure prompted a Morgan Stanley employee to observe to his co-workers that someone "could probably retire by shorting these upcoming . . . deals", and that "someone needs to benefit from this mess".

Further, Morgan Stanley is accused of playing a central role in crafting the Cheyne SIV, which sold supposedly safe short-term investments based on RMBS and other complex investments. Investors were particularly reliant on accurate disclosure of the risks because of the complicated nature of these investments.

The bank procured the same ratings for the Cheyne notes as very safe investments such as US government bonds. Its success in achieving the ratings led to huge losses to investors when the SIV failed.

The lawsuit arises from a multi-year investigation into the issuance and rating of MBS by Harris' California Mortgage Fraud Strike Force. This was created in May 2011 to investigate misconduct in the mortgage industry. As a result, Harris has to date recovered over US$900m for California's public pension funds in settlements.