Contents

Structured Finance

Bidding goodbye?

BDCs face uncertain future as market turns

BDCs and other listed vehicles are coming under increasing pressure - not least from their shareholders - to change the way they operate in the structured credit market. In some instances, they are being forced out of the sector altogether.

A raft of firms have already either liquidated or cut their fees so as to better align themselves with investors. More are expected to follow as the previously plentiful opportunity set becomes more and more limited.

"Lending to middle market companies is no longer the biggest or best opportunity under the BDC structure. That market for larger, syndicated loans seems to be saturated as supply outstrips demand, and the opportunities now are moving more toward smaller companies making top-line US$25-US$100m, which is a very different opportunity space," says Ron D'Vari, ceo, NewOak.

He continues: "BDCs are not focused on asset-based financing and smaller companies just do not fit into the BDC framework. There is also strong competition not just from banks continuing to shift toward larger borrowers, but also from private equity-style funds and CLOs, who can operate more efficiently in general in both large and medium-sized opportunities."

Many funds and private entities are being formed specifically to lend directly to or invest in the smaller US$5m-US$25m space. With increased bank activity above them and these funds below, BDCs are in danger of being squeezed out.

As many BDCs are now trading at a discount to their NAV, raising capital has become more difficult. This is one reason why buying back shares or merging has become more attractive, with for example the REIT ZAIS Financial last month declaring that it would explore a merger - or potentially liquidate its assets (SCI 11 March).

Apollo Investment Management last month announced that it would cut its fees from the start of this month (SCI 14 March). At the same time, Apollo Global Management announced its intention to buy up Apollo Investment Management stock.

Prior to that, Fifth Street Finance Corp was accused of having an "abusive fee structure" by its largest stockholder, RiverNorth Capital Management (SCI 19 November 2015). Although the firms later came to an understanding (SCI 23 February), it is another example of shareholder disquiet.

TICC Capital Corp also announced last month that it would be waiving certain fees (SCI 10 March). Where returns are not high enough and fees cannot be cut, other firms are pulling out from the market.

Hedge fund BlueCrest Capital Management ran into a similar issue to the BDCs late last year, finding that business was no longer sufficiently profitable, and returned capital to its clients as a result (SCI 2 December 2015). The firm highlighted fees as a strong driver of its move to go private.

At the same time, Third Avenue Management liquidated its credit fund under pressure from clients eager to redeem their investments (SCI 15 December 2015). The mutual fund also realigned its management structure.

D'Vari notes that BDC dividend pay-outs were previously around 8%. However, increased competition and rising expenses have made it more difficult to pay that much to investors.

He adds: "Non-BDC finance companies are also providing higher dividends - because they cannot put cash to work, they are paying dividends to pump up their stock. BDCs, by contrast, can only grow by increasing their portfolio, so they are being further pressured on the lower end."

However, a less obvious factor impacting BDCs is the stricter reporting standards that they are being subjected to. BDCs need to mark their portfolios to market for transparency purposes, but this is easier for some credits than for others. One of the explanations Third Avenue gave for closing its fund was that current market prices would only allow it to realise a fraction of fair value for many of its positions.

"The energy and commodities sector has put a much bigger dent in things than people think. Companies from that sector are traditionally big users of capital, but have not been now for some time and that is another reason perhaps that these BDCs are getting bruised," says D'Vari.

He concludes: "Larger players, such as Apollo or Blackstone, are not going to stop lending, but they might stop lending through particular arms of the company. The choice for BDCs between cutting fees or winding down is a difficult one, but these BDCs cannot keep operating if they are not able to make a profit at their current cost structure."

JL

Structured Finance

Green shoots

Renewables ABS on the EU agenda

A combination of private placements and the banking market should be able to meet the European renewables sector's financing needs in the short term, according to a new SCI/Renovate America research report entitled 'Green securitisation: harnessing institutional investment to tackle climate change'. However, there is growing recognition that the ABS market could take a lead role in raising the €200bn a year that will be required over the next decade to meet the region's commitment under the terms of the Paris Agreement on climate change.

Given the strength of demand for private placements, Independent Debt Capital Markets (IDCM) managing partner Justin May is not convinced of the need at this time for a public securitisation market in Europe to support renewable projects. "Right now, I would say that there is a huge amount of capital out there that can invest on a private basis," he says.

IDCM has arranged 10 privately-placed securitisations of renewable energy assets in the UK over the past 3.5 years for a total value of £321.71m. Most of the deals have securitised long-term revenues under renewable obligation certificates (ROCs) or feed-in tariffs (FITs) from a small number of solar energy parks.

The issuer in six of its solar transactions is The Renewable Financing Company (TRFC), a conduit that the firm set up to aggregate loans to individual projects so that it could finance them efficiently in the private bond market. All eight of the solar-backed issues comprise a single class of RPI-linked note, while the two other financings - which securitised the revenues from biomass boilers - carry fixed-rate coupons. The majority of the transactions were sold to a single investor.

While none of the issues have sought independent credit ratings from a rating agency, the investors in each case have rated the deals investment grade on their own internal assessments. "We structure the deals so that they can secure an internal investment grade rating," explains May.

He points out that the spread widening in the public bond markets during December and January virtually eroded any pricing gain that a publicly marketed issue would have been able to offer. However, he concedes that very large renewable projects - such as some of the offshore wind projects that are currently under development in the UK and elsewhere - would probably need to be financed (or refinanced post-construction) in a public market, although he insists that private-placements could accommodate deals of up to £500m in size.

The vast sums that will be needed to meet the EU's commitment to transform itself into a low-carbon economy will far exceed the funding capacity of the banks and big energy companies that have financed most renewable energy development in the region up to this point. For this reason, the European Commission and the European Investment Bank are working with commercial banks, institutional investors and NGOs such as the Climate Bonds Initiative to devise a simple, transparent and trusted framework for securitisation to adopt in future.

"We need to grow a green securitisation market to meet the macro-economic objectives for renewable energy," maintains Sean Kidney, ceo and co-founder of the Climate Bonds Initiative. "That's why we have to make one work."

The Commission's Directorate General on Climate Action has recommended that green ABS and green covered bonds should be integrated into both existing EU legislation and the proposed EU Capital Markets Union. Meanwhile, the EIB is exploring practical measures that it could adopt to accelerate the development of a green securitisation market. These include warehousing facilities that could aggregate sufficient volumes of renewable assets to support ABS transactions and the extension of its Project Bond Credit-Enhancement initiative into the renewable energy sector.

The PBCE programme could be a significant boost for green ABS, as it can raise the credit ratings on bonds to the single-A level that is now the lower limit at which most European insurance companies will invest under Solvency 2. The credit enhancement that the programme offers would therefore widen the potential investor base.

European bond markets have certainly shown a strong appetite for environmentally-friendly investment that meets the ESG (environmental, social and governance) and SRI (socially responsible investment) criteria that are becoming increasingly important to them for both practical and reputational reasons. The spectacular growth in the issuance of green bonds in Europe over the past three years bears testament to that. Moody's reported that European issuers accounted for more than 40% of the US$42bn of green bonds that were issued worldwide in 2015 and most of those issues were heavily oversubscribed.

Securitisation professionals are convinced that more green ABS transactions, and in larger sizes than the IDCM deals, will follow in the region before too long. "I think all indications are that this market will grow," says Ranajoy Basu, partner in the structured finance team at Reed Smith. "We know for a fact that banks have been exploring the possibility of bigger green securitisations."

A range of renewable assets are already in place in Europe that could potentially provide the collateral for significantly larger deals than the private deals that IDCM has arranged up to now. The assets range from highly granular collateral, such as rooftop solar systems or green loans within lenders' wider portfolios, to very large projects like offshore wind farms - whose long-term index-linked revenues are well suited to securitisation once they have been built and completed their initial phase of operation.

The problem is, however, that there are currently significant challenges in almost every case. For transactions with the more granular collateral, the main hurdle to overcome is the time and cost it would take to assemble a sufficiently large pool of assets and carry out the necessary credit assessments.

The fragmented solar rooftop sector, for example, suffers from a chronic lack of contract standardisation. Kidney says this makes it difficult to put together a large enough pool to support an ABS transaction of even €100m - probably the minimum size for a viable publicly marketed deal.

While carving a portfolio of green assets out of the loan book of a bank or auto finance company might seem to be a simpler proposition, there are very few institutions that currently have sufficient pools of such assets - even if they were willing to segregate them - to launch a reasonably sized securitisation on their own. Once the exercise starts to involve purchasing green loans from multiple institutions, the cost of managing the collateral can again quickly become prohibitive.

The Climate Bonds Initiative believes that it will be necessary to this end for more public lending institutions across Europe to stimulate the market for green loans - with preferential lending rates - in order to generate deal flows at individual banks that can support substantial ABS issues and programmes. It points to the example of the Norwegian municipal bank Kommunalbanken Norgen - which has offered a 10bp discount on such loans since 2010 - as a lead that others should follow.

The prospects of securitising revenue streams from large individual projects, meanwhile, remain somewhat blighted by the experience of the two Breeze ABS transactions, which were launched in 2004 and 2006. Wind-turbine technology was not as well proven back then and the portfolios of wind-energy projects whose revenues backed the deals suffered from higher-than-expected mechanical failures.

For more on the evolution of the renewables ABS market globally, download SCI/Renovate America's new research report - 'Green securitisation: harnessing institutional investment to tackle climate change'. SCI recently hosted a webinar - which can be accessed here - highlighting how the US solar and PACE industries are driving both innovation and issuance in the sector.

Secondary markets

Euro secondary stable

The European securitisation secondary market continues to be stable despite wider market vacillation yesterday.

A buying bias across asset classes remains apparent, but limited secondary supply is keeping activity patchy. Bolstered by new issuance UK RMBS is seeing some action and spreads are holding up despite the evolving Brexit story. Selective trading in CMBS and some high profile prime names aside, the bulk of ABS/MBS sectors remain relatively quiet.

Meanwhile, CLOs continue to be a focal point. Prints in both 1.0s and 2.0s over the last couple of sessions have been flat to slightly tighter.

There are currently five BWICs on the European schedule for today. There are two primarily ABS/RMBS combinations and the largest of which is due at 10:00 London time.

The 14 line €21.5+m current face ABS, CLO and RMBS mix consists of: AYTGH VII A2, BANKP I A2, BFTH 8 A, CAPIM 2007-1 A1, FIREN 1 B, MAGEL 2 A, MONAS 2004-I A2, RMS 20X A2C, SUNRI 09 A, TDA 13 A1, TDA 14 A3, TDA 18 A1, TDAC 6 A2 and VELAH 2 B. None of the bonds has covered on PriceABS in the past three months.

There are also three CLO-only auctions. The chunkiest of which is a six line €20m triple-B list due at 15:00, comprising: BECLO 1X D, BNPAM 2015-1A D, CGMSE 2014-3X C, CRNCL 2014-4X D, HARVT 12X D and SPAUL 5X D. None of the bonds has covered with a price on PriceABS in the past three months.

Secondary markets

US CLOs remain robust

The strong market tone in the US CLO secondary market is continuing and supporting ever-narrowing spreads.

"The market remains robust and the consensus appears to be that we'll continue to move tighter," says one trader. "The overall positive feeling helped to ensure that secondary held up pretty well at the end of last week when things looked to be getting more difficult."

Last week saw a continuation of the high levels of activity in mezz 2.0s particularly double- and triple-Bs, the trader notes. "Double-Bs accounted for 45% of BWICs, but the market was able to absorb it very well and not just through dealers adding - we've seen end-accounts coming in and looking for better names as well."

The trader continues: "That activity has, however, generated a disparity in pricing. Some tier 1 double-Bs are now in the low-800s, tier 2s in the low-900s and tier 3s in the 1300s."

The mix of sellers is changing too, the trader reports. "Among the sellers we saw last week there were quite a few hedge funds that had taken some pain and needed to sell. Now, they're more comfortable with where they are and along with other potential sellers slowed down the supply as macro volatility returned at the end of last week, so they didn't have to pull lists if things got worse."

Consequently, the trader adds: "It's a quieter start to this week but if the macro picture stays the same with oil and high yield continuing to shrug off any hurdles and the VIX keeps going lower I expect the BWIC pipeline to build strongly in to Thursday."

Nevertheless, the trader highlights one of today's list, involving three equity pieces, as being interesting. However, he says: "I think it's unlikely that all of it will trade - it's from guys who are new on the desk and they're most likely just evaluating their positions before they step in for real."

Overall, there are four BWICs on the US CLO calendar for today. They offer a range of assets across the capital structure.

At 11:00 New York time there is the above-mentioned three line $17.7m equity list comprising: ATCLO 2014-6X SUB, CGMS 2014-3A SUB and VENTR 2014-17A SUB. None of the bonds has covered on PriceABS in the past three months.

Also at 11:00 are two 1.0 triple-A slices - $30m original face of CARL 2006-9A A1and $100m original face of EATON 2006-8A A. None of the bonds has covered on PriceABS in the past three months.

Then, at 14:00 there are five 2.0 triple-As totalling $121.22m - AVERY 2014-1A A, CECLO 2014-21A A1B, CIFC 2014-2A A1L, VENTR 2014-16A A1L and VENTR 2014-17A A. Two of the bonds have covered on PriceABS in the past three months - CIFC 2014-2A A1L and VENTR 2014-17A A, last doing so at M99H on 18 April and 99.32 on 30 March, respectively.

At 14:30 there is a two line 2.0 triple-B and single-A auction involving $5m BSP 2015-8A C and $3m WITEH 2014-9A C. Only BSP 2015-8A C has covered with a price on PriceABS in the past three months - 79H on 25 February.

Secondary markets

Euro ABS/MBS picks up

Tone and volumes are on the rise across the European ABS/MBS secondary market.

"The market has been much stronger over the past few days," says one trader. "Now, at last, there is a bit more activity pretty much everywhere."

The trader continues: "We're seeing buyers across every single sector except UK sterling, which remains a little difficult and Portuguese paper, but that is simply stabilising after rallying for the past week or so."

At the same time, the trader adds: "Every BWIC seems to be trading higher. Notably, the Spanish bonds we saw in for the bid yesterday followed the overall pattern and printed tighter."

Looking ahead, the trader highlights prime assets as likely to lead the rally. "Technicals are playing in favour of prime in particular - even with new issuance picking up there's not enough paper to meet the demand."

There are three BWICs on the European schedule for today so far. At 10:00 London time there is a single £3m line of ALBA 2007-1 C, which hasn't covered on PriceABS in the past three months.

Then, at 11:00 there is a three line €1.9m Italian RMBS auction consisting of BERAB 2011-1 A1, BERCR 8 A and GIOVC 2011-1 A. Two of the bonds have covered on PriceABS in the past three months - BERAB 2011-1 A1 at 99.44 on 1 March and BERCR 8 A at 97.855 on 22 February.

At 15:00 there is a ten line 29.85m euro and sterling mixed list comprising: AYTH M4 A, BBVAH 3 B, BCJAF 8 B, BERAB 3 B, CFHL 2015-2 D, DECO 2014-BONX D, DRVES 3 A, ECARA 4 B, GLDR 2016-A B and PARGN 21 C. None of the bonds has covered on PriceABS in the past three months.

Secondary markets

Euro CLOs active

The European CLO secondary market continues to be active both on- and off-BWIC.

"Despite limited direction from primary, the secondary market is still strong," says one trader. "There have been quite a few BWICs in the past couple of sessions and they continue to trade well."

The trader continues: "Triple- and double-Bs remain the major focus. Yesterday we saw triple-Bs trade in the 460-490 range and double-Bs at 750-770DM, so they're still coming in."

However, there are also signs of attention increasing further up the capital stack. Some 2.0 single-As traded well on BWIC yesterday and select triple-As are changing hands out of competition albeit at levels unchanged on last week.

Today sees a lull in European CLO BWIC activity with none currently on the calendar for today, but there is already one auction scheduled for tomorrow, 21 April. Due at 14:00 London time the €31.09m six line 1.0 double-A list comprises: ALPST 2X B, JUBIL I-RX B, LAUR 2X B1, NPTNO 2007-1 B1, WIMIL 2007-1X B and WODST IV-X B.

None of the bonds has covered on PriceABS in the past three months.

Secondary markets

Euro secondary scrappy

Activity continues to be scrappy in the European securitisation secondary market.

Sentiment remains very positive across the vast majority of securitisation sectors in line with wider markets. However, lack of supply is still hampering any sizeable cohesive trading.

The closest to that yesterday came in Italian paper. There, following strong prints on the 11:00 Italian RMBS BWIC there was an uptick in buy- and sell-side secondary trading in similar paper, which in turn was followed by another good print on the sole Italian line item on the 15:00 mixed list.

Meanwhile, CLOs were also relatively quiet yesterday as was anticipated with no BWICs circulating. Spreads across the stack were broadly unchanged on the day.

There are currently three BWICs on the European schedule for today. One is the double-A CLO auction mentioned yesterday, the other two are mixed lists both due at 15:30 London time.

One is a is a seven line 19m list consisting of: BBVAP 6 C, BCJA 5 C, BCJAF 11 C, EMACP 2007-NL3X D, GHM 2007-2X DB, KDRE 2007-1 D and UROPA 2008-1 C. None of the bonds has covered on PriceABS in the past three months.

The other involves 11 line items totalling 7.2m - ANORI 2012-2 A, BILK 5 A, BILK 6 A, BILK 7 A, BSKY GER² A, BUMP 6 A, CAR 2012-F1V A, CFHL 2015-2 A1, DOLPH 2013-2 A, SILVA 5 A and STORM 2012-4 A1. Only STORM 2012-4 A1 has covered on PriceABS in the past three months - at 100.17 on 25 February.

Secondary markets

US CLO patterns persist

Activity and trading patterns in the US CLO secondary market are persisting.

"It's still busy with the same kinds of themes continuing," says one trader. "We're generally bid on across most of the stack, non-Volcker paper is a bit behind, but there is still a bid there as well."

Nevertheless, the trader adds: "We did see a handful of DNTs on yesterday's BWICs. Though that was more a result of people seeing what they can get away with rather than a change of sentiment."

Mezz paper continues to lead the way tighter, the trader reports. "We haven't seen double-Bs break the 700 threshold yet, but I wouldn't be surprised if a tier one short-dated piece did so soon."

However, the trader says: "Focus this morning will be on an equity list due at 11:00. Also of interest is a Trups bond in for the bid - that sector has seen activity pick up a little outside of BWICs of late, but still not in great volume."

Overall, there are currently four CLO BWICS on the US CLO calendar for today. The largest is the $30.8m nine line equity list due at 11:00 New York time, comprising: ATRM 7A PREF, ATRM 7I SUB, BABSN 2007-1A INC, BABSN 2007-1X INC, DRSLF 2012-23A SUB, MDPK 2007-4A SUB, MDPK 2011-7A SUB, STCLO 2007-7A SUB and SYMP 2012-8X PREF. Only ATRM 7I SUB has covered on PriceABS in the past three months - at VH50S on 26 January.

In addition, the single $5m line of Trups CDO PRETSL 23 A1 is due at 12:00. The triple-A tranche hasn't covered on PriceABS in the past three months.

Structured Finance

SCI Start the Week - 18 April

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

Pipeline
Last week there were nine ABS deals added to the pipeline. A further three RMBS and two CMBS also joined.

The ABS were: A$260m Flexi ABS Trust 2016-1; US$1.316bn Ford Credit Auto Owner Trust 2016-B; CNY2.736bn Fuyuan 2016-1 Retail Auto Mortgage Loan Securitization Trust; US$400m Golden Credit Card Trust Series 2016-3; US$400m Golden Credit Card Trust Series 2016-4; US$1.2bn Nissan Auto Receivables 2016-B; £108.68m SBOLT 2016-1; SMART ABS Series 2016-1; and Swiss Car ABS 2016-1.

£367.23m Finsbury Square 2016-1, Gosforth 2016-2 and A$475m-equivalent RESMIAC Triomphe Trust - RESIMAC Premier Series 2016-1 were the RMBS. The CMBS were US$160m CCRESG Commercial Mortgage Trust 2016-HEAT and US$388.5m Palisades Center Trust 2016-PLSD.

Pricings
A large number of deals also priced. As well as 13 ABS prints there was also an RMBS, two CMBS and two CLOs.

The ABS were: US$220.33m American Credit Acceptance Receivables Trust 2016-2; €549.1m Bumper 7; US$1.175bn CarMax Auto Owner Trust 2016-2; US$944.61m Chrysler Capital Auto Receivables Trust 2016-A; CommonBond Student Loan Trust 2016-A; US$332.69m CPS Auto Receivables Trust 2016-B; US$550m Discover Card Execution Note Trust 2016-2; US$300m Discover Card Execution Note Trust 2016-3; US$385.5m Hertz Fleet Lease Funding Series 2016-1; US$476.19m Master Credit Card Trust II 2016-1; US$275m NCF Dealer Floorplan Master Trust Series 2016-1; US$500m Penarth 2016-1; and US$425m Sonic Capital 2016-1.

US$1.165bn CAS 2016-C03 was the RMBS while US$694.7m CGCMT 2016-GC37 and US$1.4bn FREMF 2016-K54 were the CMBS. The CLOs were US$424m BlueMountain CLO 2016-1 and €412m Cadogan Square CLO VII.

Markets
US ABS primary market activity picked up last week, as new issue volume of US$5.5bn confirmed the second-highest weekly issuance of the year so far. However, JPMorgan analysts note that issuance for the year-to-date is still lagging 2015's pace. They add: "While investor reception for off-the-run and non top-tier ABS has thawed, spread concessions remain substantial and conditions remain challenging. Secondary took a backseat to primary this week, with spreads mostly tighter to flat on low flows."

European ABS, RMBS and CMBS activity was skewed to the end of the week, as Bank of America Merrill Lynch analysts note that US$118m of the US$300m that appeared on the week's BWICs did so on Friday. They say: "Trading levels were generally strong for UK non-conforming and buy to let RMBS, particularly for 2.0 paper, while the gap between 1.0 triple-A and double-A spreads appeared to narrow over the week."

Editor's picks
Hedging operation: Credit Suisse is prepping a unique Sfr700m ILS deal. Referred to as OperationalRe, it will utilise catastrophe bond and ILS technology to hedge a portion of the bank's operational risk and is believed to be the first transaction of its kind...
Consolidation concerns: The consolidation of evaluated pricing firms poses a number of concerns for the securitisation and derivatives markets. A diminishing number of independent pricing points, the potential for higher service charges and a possible threat to innovation are at the top of the list...
US CMBS shaped by primary: New issuance pricing and trends are shaping what's happening in the US non-agency CMBS secondary market. "Primary is driving a lot of what's happening in secondary right now," says one trader. "New issuance spreads have come back a long way from recent wides - triple-As peaked at 173 and the latest JPM deal priced at 129 - and secondary levels have followed suit..."
On the rebound: The December to February period was the worst experienced by the US CLO market since the financial crisis, but the subsequent rally in commodities and high yield has enabled most of the returns lost during that period to be regained. Cleaner portfolios of new deals, together with tightening spreads, are expected to support a growing primary market for the rest of the year...

Deal news
• Funding Circle is in the market with its inaugural rated securitisation, the first ABS of marketplace loans originated in Europe. The £130m deal, dubbed Small Business Origination Loan Trust 2016-1 DAC, is backed by marketplace loans to UK SMEs.
• Justice Snowden last week handed down judgment of the English High Court in the Windermere VII Part 8 proceedings case. The plaintiffs' arguments have been dismissed.

Regulatory update
• The Italian government is proposing to create a €5bn fund capitalised by the strongest financial institutions in Italy, together with the government-owned entity Cassa Depositi e Prestiti. The move is part of new measures to support the banking market and legislation changes to enhance the underlying infrastructure.
• ISDA has published an updated classification letter to enable counterparties to notify each other of their status for clearing and other regulatory requirements under EMIR. The updated letter covers the clearing obligation for certain CDS index classes, as well as some interest rate derivatives.
• Credit Suisse will pay the NCUA a revised US$50.3m sum for a case settled last month surrounding the bank's role in the sale of faulty pre-crisis RMBS (SCI 29 March). The original agreement had Credit Suisse paying out US$29m, but this has now been increased following prejudgement interest determined by a ruling court in Manhattan.
• The EBA has published a report identifying a number of recommended practices for market players to reach compliance within securitisation risk retention, due diligence and disclosure. The recommendations are based on the regulator's analysis of previous measures taken in 2014.
• US Attorney General Eric Schneiderman has announced a US$5bn settlement with Goldman Sachs over the bank's deceptive practices leading up to the financial crisis. The settlement was negotiated through the RMBS Working Group.

Deals added to the SCI New Issuance database last week:
AmeriCredit Automobile Receivables Trust 2016-2; BAMLL 2016-ASHF; CGGS 2016-RND; DT Auto Owner Trust 2016-2; FREMF 2016-K54; FREMF 2016-KF15; GSMS 2016-ICE2; GSMS 2016-RENT; Hypenn RMBS V; Hyundai Floorplan Master Owner Trust Series 2016-1; Navient Student Loan Trust 2016-2; Towd Point Mortgage Funding 2016-Granite1; VCL 23

Deals added to the SCI CMBS Loan Events database last week:
BACM 2006-2; BACM 2006-3; BACM 2006-4; BACM 2006-4 & WBCMT 2006-C27; BACM 2007-1, JPMCC 2007-LDP10 & GECMC 2007-C1; BACM 2007-3; BSCMS 2006-PWR11; BSCMS 2007-PW15; COMM 2012-CR3; DECO 2007-E5; ECLIP 2007-2; GSMS 2012-GCJ7; MLMT 2004-BPC1; MSC 2007-HQ11; RIVOL 2006-1; TAURS 2014-FR1; TITN 2007-CT1; TMAN 7; WBCMT 2005-C12; WBCMT 2007-C33; WFRBS 2014-C22; WINDM VII; WINDM XIV

CLOs

US CLO calls climb

US CLO calls continued to increase last year, as JPMorgan analysts estimate 76 CLO 1.0s and 13 CLO 2.0s were called. While they expect prepayments to remain light in 2016, the analysts believe the recent rally in loan prices could see an even greater rate of optional redemptions.

The 89 CLOs called last year compare to 85 called in 2014 and 75 called in 2013. The 76 CLO 1.0s were worth US$34.6bn in original notional and US$11.1bn in current outstanding at the time of the call.

The 2006 vintage had the most deals called. There were 48 deals from this vintage, with the next-highest vintage being 2007, which had 13 deals called.

The entire CLO 1.0 universe has moved beyond its non-call period and the analysts estimate US$69.8m of US CLO 1.0s remain outstanding. More than half of this is comprised of the 2007 vintage, which could dominate calls in the next few years.

CLO 1.0s called last year had an average of 32% of the deal outstanding and they were typically called three years after the end of the investment period. Around 85% of the 2007 vintage deals had triple-A tranches outstanding prior to the call, while 2006 vintage deals averaged 56% and 2005 vintage deals averaged 40%. Of the CLO 1.0s with triple-As outstanding, the average triple-A factor at call was 12%, with the average deal factor at 36%.

There was also an up-tick in called CLO 2.0 deals, as 13 were called, compared to six optional redemptions in 2014. Of those 13, six were from the 2011 vintage, while four were from 2012 and two were from 2013. The total original deal notional of called 2.0 deals in 2015 was US$7.1bn and the outstanding deal balance at time of call was US$6.42bn.

While every 1.0 deal had amortised liabilities when it was called, 58% of the called 2.0s were fully outstanding when called. Only one deal was called without triple-As remaining outstanding.

Of the 12 2.0 deals that were called with triple-As outstanding, the average triple-A bond factor was 88% and the total deal factor was 92%. The JPMorgan analysts note that one of the 2012 vintage deals that had 100% of the deal outstanding was called one year before the expiration of the reinvestment period.

"Looking at the timing of called CLOs in 2015, the months that experienced the largest amount of calls were January and October, with 14 called deals in each of these months. We anticipated that the timing of optional redemptions would have been frontloaded in the first half of 2015, as equity holders generally like to call CLOs when loan prices are high, but the results did not validate our expectations. 43 deals (48%) were called in the first half of 2015, versus 46 deals (52%) in the second half of the year," the analysts note.

The 1.0 universe is expected to continue to see a high number of calls, especially as loan prices continue to rally and amortisation and funding costs for outstanding deals increase. Should the rally in prices be sustained, more 2.0 CLOs could also be called, particularly where CLO equity recently changed hands and equity investors are keen to exit the trade.

JL

CMBS

Sport Chalet exposure gauged

Morningstar believes that 11 CMBS loans - several of which have significantly elevated risk of term or maturity default - worth US$628.9m could be affected by Vestis Retail Group shuttering its Sport Chalet division in connection with its 18 April Chapter 11 bankruptcy filing. The sporting goods retailer has reportedly already begun liquidation sales at all 47 of its stores across Nevada, Arizona and California.

Among the loans exposed to Sport Chalet, the US$63m Crossroads Marketplace (securitised in CGCMT 2007-C6) could become the most at-risk loan due to the closure, according to Morningstar. Sport Chalet is the largest tenant, with 42,000 square-feet, or 17.5%, of the total space. The closure of this store follows the loss of the centre's Best Buy store and would leave the property with 98,000 square-feet vacant.

In 2015, the property generated cashflow of US$2.3m - 49% below issuance - for a debt service coverage ratio of 0.65x. The loss of Sport Chalet will push the DSCR further below break-even. Even if the borrower could cover debt service shortfalls, the loan sponsor - SKT Investments - may be unable to refinance the loan at its April 2017 maturity date.

The US$78.9m Grand Plaza loan (CD 2007-C4) could become a maturity risk in January 2017. The property generated cashflow that was about 12% below issuance. Sport Chalet occupies 11% of the space, which could push the 1.13x DSCR to break-even, making refinancing the loan challenging.

Two loans - the US$15.4m Conejo Valley Plaza (MSC 2006-IQ12) and US$17.8m Scottsdale Retail Center (MSC 2008-T29) - will also face high term default risks as a result of the closures. The Sport Chalet stores at these locations occupy 64% and 40% of the space respectively and will push cashflow at both properties well below break-even.

Morningstar sees lower levels of risk at the US$67m Nut Tree Center (GSMS 2013-GC10), US$182.3m Burbank Town Center (JPMCC 2006-LDP8) and Westfield Mission Valley (US$100m in WFRBS 2013-C16 and US$55m in WFRBS 2013-C17) assets as Sport Chalet occupies smaller percentages of the properties and cashflows will likely absorb the loss of the tenant.

Vestis added Sport Chalet to its portfolio in 2014, when it acquired the chain for US$70m, including the assumption of US$52m in debt. The firm's other chains - Eastern Mountain Sports and Bob's Stores - will also be closing some of their stores, but none of them are tenants in properties backing CMBS loans. Nevertheless, Morningstar suggests that closure risks could affect nine loans totalling US$141.7m where Eastern Mountain Sports and Bob's Stores are collateral tenants.

Vestis is the second major sporting goods retailer to file for bankruptcy this year, following The Sports Authority in March. Quiksilver filed for bankruptcy protection in September, closing 20% of its stores, while City Sports filed for bankruptcy protection and closed all of its stores last year. A combination of poor execution and competition from stronger retailers and online retailers has affected sales for chains in this sector, Morningstar notes.

CS

CMBS

2016 vintage touted

Recent capital markets volatility has resulted in tighter lending conditions where US CMBS originators are becoming more selective and conservative, while providing the B-piece buyer with greater buying power. Morgan Stanley CMBS strategists believe this will result in better collateral performance of 2016 vintage loans compared to those securitised in 2015 and 2014 vintage deals, where underwriting was less stringent. At the same time, credit enhancement is rising across the CMBS capital structure, as investors require a greater percentage of bonds to be rated by a major rating agency.

First-quarter private-label CMBS issuance came in 34% lower than in the prior year. The Morgan Stanley strategists suggest that CMBS issuance volumes may be returning to a more normalised state similar to that seen in 2000-2004, when issuance averaged US$36bn, with maximum issuance of US$70.8bn in 2004 prior to the CDO boom.

The average size of conduit deals has declined by 16% in 1Q16, resulting in fewer loans being originated. However, the pace of deals brought to market hasn't changed, with one more conduit deal pricing in 1Q16 than in 1Q15.

The strategists note that weighted average LTVs declined by 3.3 percentage points during the quarter to the lowest level since 2011, driven by an increase in the percentage of loans with LTVs of less than 60%. Interest-only loans increased, but they were underwritten more conservatively, with the weighted average LTV of full IO loans below the weighted average balloon LTV for the pool. Finally, the percentage of refinance loans has also declined.

Rising credit enhancement is driven by two primary factors. First, the rating agencies penalise the declining diversity of 2016 vintage deals. Second, 2016 vintage deals all had investment grade tranches rated by at least one of the major rating agencies. This is a significant change compared to many deals issued in 2014 and 2015, where major rating agencies were often dropped further down the capital structure.

"We believe these factors may lead to the outperformance of 2016 vintage deals relative to 2015 and 2014 vintage deals. But spreads are trading too generically across these vintages, providing an opportunity for investors to rotate into new issue deals, with single-A rated bonds providing the best risk-adjusted returns," the strategists conclude.

CS

Insurance-linked securities

Cat bond issuance hits record

Catastrophe bond issuance set new records for issuance in 1Q16, according to Aon Benfield's quarterly report on the sector. The ILS sector witnessed issuance of US$2.22bn across 10 transactions, an increase of more than 30% on the previous record set in 1Q15.

In addition, cat bond outstandings also reached unprecedented heights, standing at US$25bn for the quarter. Bonds covering US named storm and earthquake dominated the market. So too did Japan typhoon, albeit to a lesser extent, through the Akibar Re and Aozora Re deals.

Other placed perils included US severe thunderstorm, winter storm, wildfire, volcanic eruption and meteorite impact. Canadian earthquake and US medical benefits ratio coverage were also part of the quarter's issuance.

In its own quarterly update, Willis Capital Markets & Advisory notes that US transactions offered healthy returns to investors. Merna Re was the only deal to provide a coupon lower than 5%.

Meanwhile, activity also increased in the secondary market, with trade volume rising more than 25% compared to 4Q15. In total, 311 trades totalling US$307.75m were reported in 1Q16, according to TRACE data.

Willis says the active secondary market was a result of investors taking opportunities to rebalance their portfolios in the face of the impressive primary offering. Prices initially dipped somewhat before stabilising throughout the quarter and then finishing with a strong bid tone.

All Aon ILS indices posted gains for the quarter. Its all bond and double-B bond indices achieved the greatest growth, with returns of 1.81% and 1.43% respectively. US hurricane and earthquake bond indices followed, with respective returns of 0.72% and 1.09%.

JA

Structured Finance

Chasing ubiquity

Marketplace lending sector prospects discussed

Representatives from Prosper Marketplace, MountainView Capital and Credit Suisse recently discussed the growth of marketplace lending during a live webinar hosted by SCI (view the webinar here). This Q&A article highlights the main talking points from the session, including the impact of rising rates and the role of ABS in the sector. For a broader and more in-depth exploration of these themes, attend SCI's Marketplace Lending Securitisation Seminar on 28 June.

Q: What is the history of the marketplace lending sector?
Ron Suber, president, Prosper Marketplace: Marketplaces are in all of our lives in a lot of different ways. Travel has been disrupted in a major way, retailers like Amazon or eBay have revolutionised shopping and companies like Uber have changed transportation without owning a single car. Now something similar is happening in how we borrow and lend.

About 10 years ago, Prosper, Lending Club and Zopa started as peer-to-peer platforms where people could invest with other people, primarily doing debt consolidation. These online marketplaces have grown rapidly and globally in consumer loans, in business loans, in student loans and in mortgages.

Partially this is because we have now seen a collision of Silicon Valley, the banking industry and Wall Street. For the first time, we now have people from each of these industries represented at all of the leading marketplaces. Additionally, we also have an increased demand for credit and a search for yield, which these marketplaces are able to provide.

Q: What effect will rising interest rates have on the sector?
RS: Some platforms have increased their rates in response to the Fed's move, while others have stayed steady for now because they have actually been increasing rates already over the last three, four or five months. These marketplaces can be canaries in the coal mine and see changes in unemployment and delinquencies and the economy well in advance of traditional lenders.

I cannot emphasise enough the importance of the risk-adjusted returns of these marketplaces and, as rates rise and defaults rise, the platforms may have to increase rates. However, historically the demand from borrowers has risen alongside rates, so I do not think that will be a major headwind for the majority of the marketplaces.

Q: How can online lenders mitigate risk?
RS: Online lenders typically have a series of loan grades for borrowers. In Prosper's case, it is double-A for the highest-income, lowest-DTI, lowest-interest rate borrower; then single-A, single-B, all the way down to HR for the higher rate, higher risk category. It is also critical that expected defaults must remain equal to or higher than actual defaults, which is why it is important to readjust expected defaults regularly.

Marketplace platforms are outperforming and marketplace lending is the number one risk-adjusted asset class in the US. We are proving to investors that platforms can adjust to different environments and continue to deliver risk-adjusted returns.

Q: What is the effect of rising rates on existing lenders and pricing of outstanding loans?
Chris Kennedy, md, MountainView Capital: There are some advantages to rising rates for lenders, not least increased duration and servicing fees. Rising rates will also encourage platforms to develop new products to meet borrower needs, and that is good for the market.

Investors are going to be more diligent on their internal model valuations and paying close attention to delinquency rates, roll rates and defaults and severities, and that will all feed into loan pricing. There is a lot of volatility in the capital markets at the minute, but as investors develop a better understanding of this market and learn how to manage the risk, the market will grow.

Q: How is performance data transparency evolving?
CK: We live in a big data world and as an investor in the platforms you have access to all of the historical loan-level data. With Reg AB 2 coming in, all new issue loans from sectors such as autos are going to have loan-level data made available, so that further enhances transparency. The challenge for investors will be aggregating all of the available data and putting it into a model in a way that provides meaningful results.

Q: What role does securitisation play in the market?
Stephanie Yeh, director, Credit Suisse: Since the first securitisations in 3Q13 and 4Q13, it has been pretty remarkable to see the marketplace lending securitisation market develop. There have been almost 50 deals now, spanning student loans, unsecured consumer loans and small business loans, totalling nearly US$9bn of issuance.

In 2014 we saw US$1.4bn of issuance across 10 deals and in 2015 we saw a significant increase to US$7bn across 32 deals. While that growth has been remarkable, if you look at the broader consumer ABS market, it still only makes up a very small portion of the US$150bn of issuance that we saw last year across consumer ABS. However, we expect the number of deals to grow and for marketplace lending to grow as a portion of the consumer ABS market.

Q: How do marketplace lending securitisations compare to other ABS?
SY: The collateral is actually quite simple to understand. If you look at the unsecured consumer loans, they are instalment loans, and so very similar to auto loans in structure. What sets this space apart - as Ron touched on earlier - is lack of historical performance data. That is developing, though, and the gap is growing smaller.

From a deal perspective, the structures have been simple. A couple of deals have had pre-funding accounts and revolving periods, but the majority of the issuance has been amortising transactions backed by a static pool of collateral. One benefit for the space which has countered the lack of historical performance has been the relatively short duration of the deals that have been done to date, as well as the significant amount of credit enhancement that mitigates potential volatility in different cycles.

The other difference which I think is probably here to stay is that the sponsor of the securitisation may not be the originating platform. While we have seen that in other consumer ABS asset classes, it is something that we expect to see more commonly in marketplace lending securitisations.

Q: What is the role of rating agencies in the market?
SY: Rating agencies have a very important role in the development of the securitisation market for marketplace lending collateral. Over time, we expect to see more and more deals being rated. From 2Q15 to 4Q15 we saw around 70% of deals being rated and we expect that to grow as more platforms mature and develop performance history that the rating agencies can look to.

The rating agencies allow for a broader investor base in the transactions. Also, because there is a broader investor base, there is less funding volatility for the sponsor of the securitisation and therefore more stable and consistent funding for both the loan aggregators and the platforms. This is because the rating agencies serve as a form of third-party validation because of the extensive qualitative and quantitative diligence they do on both the platforms themselves and on the sponsors.

Q: How can secondary trading help the marketplace to grow?
CK: This is a huge opportunity for investors to help to create a secondary market, much as they have done for residential whole loans and other consumer loans on bank balance sheets, as well as bank loans in the corporate space. What would really help the market to grow is to get more market participants looking at these asset classes - whether it is consumer loans, student loans, autos or potentially mortgages - and trading them, whether on a servicing release basis or servicing retained basis that the platforms retain that servicing relationship. That is the big challenge for the industry."

Q: What are the future prospects for marketplace lending?
RS: For me, the future is one where there are listed vehicles so that you can invest in consumer credit, or business credit, or student loan credit or mortgage credit, either through a closed-end fund or an ETF. It would mean that instead of going to one of the platforms, you could literally own a stock on one of the global exchanges.

The other key aspect is ubiquity and making sure that people understand the benefits of marketplace lenders - making sure marketplace platforms are available and understood. That relies upon educating people about why this is such a good way to borrow and then getting to the point where perhaps you could just have an app on your phone with a waiting line of credit from an online marketplace. So, if you want to buy a holiday or make another large purchase, you can swipe right on the app and borrow instantly.

Q: What are the prospects for marketplace lending securitisation?
SY: We certainly expect the securitisation market to continue to grow. Themes such as increased transparency and consistency and continuing maturity of the platforms are going to support the further development of the securitisation market and this industry.

We expect to see more platforms coming to market and more investors too, especially as more deals are rated and more time is spent developing that investor base and building that transparency with term ABS investors. Gaining the trust of that investor base as well is going to be very important, and part of that is bringing in more rating agencies.

We do also expect to see more loan aggregators that act as sponsors for securitisations, as loan investors gain scale in their portfolio and have sufficient portfolios to access the securitisation market, perhaps loan aggregators following Victory Park and KKR's path and combining their portfolios into one transaction.

This is all going to be driven by standardisation and consistency in the deals, both in collateral and in deal structure. That is a trend we are already starting to see in the market.

Q: What will we see for valuations and transparency?
CK: This market is in the hyper-growth stage and, as more investors get engaged, it will change the way these assets are valued. There is going to be a need for increasing the quality of the valuations and the level of transparency that you provide to your investors.

SCI's Marketplace Lending Securitisation Seminar is being held on 28 June at Kaye Scholer's offices at 250 West 55 Street, New York. The conference programme consists of panel debates covering regulations, the investor perspective, platform differentiation and emerging assets. There will also be a case study presentation on how a typical marketplace ABS is put together.

Click here to register for the event.

JL

Structured Finance

Distressed strategist brought in

GSO Capital Partners has recruited David Flannery as senior md, focusing on distressed strategies in both private and public markets. He joins the Blackstone subsidiary from Anchorage Capital Group, where he focused on illiquid credit opportunities and CLOs.

Flannery also previously worked at Bank of America Merrill Lynch, in various roles that included chief risk officer of global banking and markets and global head of leveraged finance. Prior to that, he headed global leveraged finance at Deutsche Bank.

Structured Finance

Special situations analyst added

TCW Group has appointed Steven Purdy to its fixed income credit research group as md and special situations analyst. He will take responsibility for analysing and identifying credit opportunities with companies in stressed and distressed situations.

Purdy is based in Los Angeles and reports to Jamie Farnham, director of credit research. He was previously based in London with TPG Capital and has also worked for Goldman Sachs in both London and New York.

Structured Finance

Ashurst promotes SF pro

Ashurst has promoted Paul Jenkins to managing partner, which will see him join the firm's board. This adds to his role as co-head of Ashurst's global finance division.

Jenkins will also lead the law firm's executive committee, of which he is already a member. He has particular expertise in corporate finance, debt capital markets and securitisation.

Jenkins will remain located in Sydney for his new role. He succeeds James Collis, who will return to Ashurst's finance practice at the end of May.

Structured Finance

Investment boost for TCP

CNO Financial Group has invested in a non-controlling minority interest in Tennenbaum Capital Partners. TCP will continue to operate on a stand-alone basis under its present executive leadership.

In addition, CNO has agreed to make general account investments over a period of time of approximately US$250m across TCP's managed funds and strategies to assist in, and benefit from, its investment management skill and the overall platform's continued growth in assets under management. The commitments include investments in TCP's direct lending and special situation strategies, as well as a US$30m commitment to its publicly traded business development company TCP Capital Corp.

Sandler O'Neill + Partners served as financial advisor and Simpson Thacher & Bartlett acted as legal counsel to CNO in this transaction. Credit Suisse served as financial advisor and Skadden, Arps, Slate, Meagher & Flom acted as legal counsel to TCP.

Structured Finance

APAC solutions unit formed

Natixis has appointed Fabrice Guesde as head of global structured credit & solutions (GSCS), Asia Pacific, to lead the newly-created unit. Based in Hong Kong, he reports to GSCS global head Emmanuel Lefort and locally to APAC fixed income head Viet-Linh Ha Thuc.

Guesde has been with Natixis since 2006, latterly in Paris as head of credit & insurance solutions. The expansion of GSCS to Asia Pacific offers Natixis' regional clients the bank's full suite of structured credit solutions.

The new team also includes Alistair Ho, who maintains his role as head of structured credit syndicate & origination, Asia Pacific.

Additionally, the bank has made an executive appointment in the region. Alain Gallois has been named ceo, corporate & investment banking (CIB), Asia Pacific, and a member of Natixis' executive committee. He replaces but will report to François Riahi, who was recently made co-head of CIB - in charge of financing & global markets - and a member of the Natixis senior management committee. Gallois was previously global head of fixed income at the bank.

CLOs

Manager replacement resolved?

Pursuant to a written resolution, the subordinated noteholders of Strawinsky I CLO have resolved to direct the trustee to appoint Dynamic Credit Partners Europe as successor investment manager, subject to controlling class (currently the class B noteholders) approval. IMC Asset Management tendered its resignation as investment manager for the second time on 15 April, having initially tendered its resignation on 31 December 2015.

IMC was forced to submit a new notice of resignation after the conditions to resignation set out in clause 10.5 (Appointment of Successor Investment Manager) of the master investment manager terms were not satisfied (SCI 19 February). Before that occurred, however, Guggenheim Partners Europe submitted a letter notifying the issuer of its interest in potentially serving as successor investment manager and requesting to discuss this opportunity with the noteholders.

Class B noteholders are asked to contact the trustee, should they wish to disapprove the proposed appointment of Dynamic as successor investment manager.

For other recent CDO manager transfers, see SCI's database.

CMBS

CREFC Europe board changes made

CREFC Europe has made a series of board appointments, including Steve Willingham as the successor to chair Madeleine McDougall on a one-year term from 14 November. ING Real Estate Finance structured products md Mike Shields has also joined the association's board.

Willingham is head of real estate finance for EMEA at HSBC and has also worked at BlackRock, MGPA, as securitisation md at Merrill Lynch and as head of structured property finance at Nationwide Building Society. Shields has held a number of roles at ING and has also worked at PB Capital, Helaba and Chemical Bank.

Insurance-linked securities

Global ILS head poached

TigerRisk Partners has recruited Philipp Kusche as partner and global head of ILS and capital solutions. In this role, he will develop and structure ILS and other insurance risk-to-capital products.

Kusche arrives from Swiss Re Capital Markets, where he was head of ILS structuring and origination. He was responsible for creating and executing catastrophe bonds, sidecars, contingent capital structures and other alternative capital products for the firm. In addition, he structured, priced and executed a large number of cat derivatives.

Kusche will now report to Tony Ursano, president of TigerRisk.

RMBS

UBS settlement pushed up

The NCUA has had another of its recent successful RMBS settlements increased after UBS was ordered to pay the federal agency a post-interest total of US$69.8m. The decision was made by the US District Court for the Southern District of New York, after UBS recently agreed to dish out US$33m in compensation for its role in selling faulty deals to two failed corporate credit unions (SCI 1 March).

The NCUA represented Members United and Southwest as liquidating agent in the case. The initial settlement was made back in February on the basis that UBS also pay a determined interest fee, as well as attorney costs - the latter of which is still to be determined.

The case involved UBS selling US$432.4m in RMBS to the credit unions between 2006 and 2007. The NCUA's argument claimed that the offering documents contained misinformation over the loans that were originated in accordance with underwriting guidelines.

The updated settlement follows a court determination last week for Credit Suisse to pay out a US$50.3m sum following interest added to its original US$29m settlement agreement.

RMBS

RMBS research head hired

Vipul Jain has joined Wells Fargo's research and economics department as md and head of residential mortgage research. Based out of offices in New York and Charlotte, North Carolina, he will lead the bank's RMBS research team in developing strategy, publishing research and generating investment ideas for institutional investors.

Jain reports to Marielle Jan de Beur, head of structured products research for Wells Fargo. He joins the bank from Morgan Stanley, where he was head of agency RMBS research. His previous sell-side research experience includes coverage of agency and non-agency RMBS at both Morgan Stanley and Bank of America Merrill Lynch.

ABS

Navient extends more bonds

Navient has extended the maturity date on an additional US$1.2bn of bonds backed by FFELP student loans. The amendments include the A3 and B tranches of SLM Student Loan Trust 2013-6, which were respectively pushed back to 2055 and 2083.

SLM Student Loan Trust 2014-2 also had its A3 and B tranches' final maturities extended to 2055 and 2073 respectively. Further, Navient set 2083 as the maturity date for the subordinate tranches of SLM Student Loan Trust 2008-7 and 2008-9.

The changes officialy went into effect yesterday. The latest amendments means that Navient has extended the legal maturity dates legal on US$4.8bn of bonds from Navient-sponsored FFELP ABS since December 2015.

ABS

ABS platform goes fully green

Renovate America's PACE programme is the first to be labelled a completely green ABS platform. The move means that Renovate's first four securitisations - completed in 2014 and 2015 - have been designated as green bonds, to add to their two most recent deals.  

Sustainalytics provided a second opinion that the bonds adhere to the green bond principles, finding that the proceeds fund projects with environmental benefits. Renovate recently announced that it hit the US$1bn green bond landmark when it closed HERO Funding Trust 2016-1 (SCI 15 February).

"Now that we have established an entirely green bond platform, we are seeking to align the products and securities that we produce with correlated pools of capital," says Craig Braun, md, capital markets at Renovate America.

The HERO programme currently provides services to 397 cities and counties in California. Renovate recently revealed plans to make its transactions from the platform available to European investors too as early as next year (SCI 9 March).

ABS

SLABS downgraded after correction

In a move impacting approximately US$1.2bn of securities, Moody's has affirmed six tranches and downgraded 11 across six private student loan ABS sponsored by Navient Solutions. The notes were placed on review on 19 January to reflect the correction of an error in the calculation of net losses on the outstanding collateral pools that were used to run Aaa and other rating-level cashflow scenarios.

The affected transactions are SLM Private Credit Student Loan Trust 2002-A, SLM Private Credit Student Loan Trust 2003-A, SLM Private Credit Student Loan Trust 2003-B, SLM Private Credit Student Loan Trust 2003-C, SLM Private Credit Student Loan Trust 2004-A and SLM Private Credit Student Loan Trust 2004-B.

Moody's says the error involved giving too much benefit to future recoveries from previously defaulted loans, which resulted in the underestimation of the credit enhancement needed to achieve the respective ratings on the notes. While recoveries from previous defaults are a one-time benefit, the agency had incorrectly applied a multiple benefit to these recoveries in stressed scenarios.

During the review period, Moody's conducted performance and cashflow analyses of the transactions to assess whether the available credit enhancement was sufficient to support the current ratings. Following the completion of these analyses, its updated lifetime net losses as a percentage of original pool balance are approximately 10.5%, 12.9%, 14.4%, 15.6%, 17.2% and 16.4% for the 2002-A, 2003-A, 2003-B, 2003-C, 2004-A and 2004-B trusts respectively.

Net loss projections have increased in part due to the correction of future recoveries on the previously defaulted loans. In addition, recoveries from previously defaulted loans insured by HEMAR Insurance Corporation of America had been overestimated and have been corrected.

For the 2003-A, 2003-B and 2003-C securitisations, the increase in projected lifetime net losses is also due in part to weakened pool performance, Moody's notes. Undercollateralisation in these transactions has declined further to -2.8%, -4.7% and -5.5% respectively.

These 2003 transactions have high funding costs because they are funded in part with auction-rate securities, which failed the auctions and were reset to pay higher rates. The high coupon rates on the auction-rate securities significantly reduced excess spread and eroded overcollateralisation levels, thereby exposing the notes in these transactions to default risk.

Structured Finance

Combo note RFC issued

Moody's has proposed revisions to how it rates combination securities - otherwise referred to as combo notes. These products are CDOs or CLOs that typically combine their equity with either secured notes from the same transaction or other securities, such as Treasury STRIPS.

Underlying securities for combo notes are referred to as components. Moody's says that combo note ratings may be sharply downgraded if some, but not all, underlying components are refinanced. 

As combo notes often have very few components, such refinancing can represent a sudden and significant change to their credit profile. In the presence of such risks, the agency proposes incorporating refinancing scenarios into the credit analysis of the notes.

Moody's is also considering whether to continue rating such combo notes outright, explaining that there is an unusual nature to the rated balance promise associated with the notes. While assessing the rated balance promise, the agency says that credit risk does not present any unique analytical challenges. However, it suggests that market participants may be more interested in its opinion of the credit risk of the entire contractual promise.

Market participants are invited to submit their comments on the proposals by 10 June.

Structured Finance

China hurdles laid out

Moody's says that the Chinese securitisation market could gain valuable traction once a number of hurdles are cleared. Barriers to the market's growth were at the centre of recent discussions between the agency and market players at the China Securitisation Forum in Beijing earlier this month.

"China's economy is gradually transforming into one that is driven by consumption rather than exports," says Jerome Cheng, a Moody's svp. "As a result, consumption-related assets - such as credit card receivables - will become abundant in the market."

At end-2015, credit card limits in China totalled CNY7.08trn, of which CNY3.09trn were outstanding, according to the People's Bank of China (PBOC). The amount of outstanding receivables had increased 32.05% over 2014, signifying the ABS potential in the market.

Likewise, RMBS has also started to gain traction and increase its importance as an asset class. The PBOC has so far approved the registration of CNY220bn worth of RMBS by seven Chinese banks.

In contrast, the agency says that NPLs may face a tougher time. This is due to the lack of precedent and recovery uncertainties in terms of timings and amounts.

Securitisation issuance in China's interbank bond market totalled CNY593bn in 2015, contributing only a tiny fraction of the funds provided by the banking sector. By comparison, issuance in the US amounted to US$2trn, or 31% of the total US$6.5trn bond market issuance in 2015.

In order for China to aspire to such an established and scalable market, a number of building blocks must be in place, according to Moody's. These include improving standardisation and transparency in ABS, which the agency says are crucial for enhancing not only the initial credit analysis of securitisations at closing, but also the ongoing monitoring of outstanding deals.

Other proposed advancements include greater liquidity in the secondary market and a well-established investor base to ensure the placement of ABS paper. Another mooted incentive to boost the market is the need for repeat issuers that provide ongoing and consistent issuance. Further, Moody's stresses the necessity of lower funding costs, alternative funding sources and better investment returns.

However, a key issue that still persists in the market is the availability of suitable assets to securitise. After China's securitisation market reopened in 2012, many originators have chosen better quality assets to securitise. In the current slow growth environment in the country though, banks are keen to keep quality assets on their balance sheets.

On the investor side, the majority of asset-backed debt in China is held by banks. Therefore, banks are both the main issuers and investors in securitisations in the country. This situation keeps the asset risk within the banking system and lowers the liquidity of the debt, but Moody's believes that eventually a diversification of the investor base will be required to redistribute the risk.

Structured Finance

SIV extension sought

Harrier Finance Funding is seeking to amend its transaction documents to allow its notes to be extended to July 2022 from July 2016. The proposal has been approved by the sole noteholder and Moody's has determined that the move will not impact the SIV's ratings to be reduced or withdrawn.

Structured Finance

Green securitisation webinar launches

Renewables, or 'green', ABS instruments offer an attractive source of yield and fulfil socially responsible investment criteria. Meeting the goals agreed to at December's COP 21 Conference on Climate Change will require an investment of several trillions of dollars and so many are looking to securitisation to help finance this investment.

An array of renewable energy projects and assets have characteristics that are a good match with the key requirements of asset-backed investment. In the US, two types of transaction are at the forefront of the nascent market for green securitisations - solar and PACE.

SCI is hosting a webinar at 3.30pm GMT today that will provide an introduction to solar and PACE ABS, focusing on the challenges and opportunities presented by these asset classes. Craig Braun, md of capital markets at Renovate America, Benjamin Cohen, ceo and chairman of T-Rex Analytics, and Laurence Pettit, partner at Kramer Levin will discuss the evolution of and outlook for the green securitisation market. They will also focus on structuring considerations, performance trends and risk evaluation across solar and PACE transactions.

To view the webinar, email SCI for a complimentary registration. The recording will be available to download via the SCI website after the event.

For a broader and more in-depth exploration of the renewables ABS space, see the SCI special research report due to be published later this week.

Structured Finance

Private debt fund supported

British Business Bank Investments has invested £30m in the first close of CORDET Direct Lending, a new debt fund focused on smaller mid-cap businesses. The fund, which will offer direct lending and private debt solutions, has held its first close at approximately €200m and is targeting a final close of €600m within the next year. CORDET has committed to invest at least £60m in UK smaller mid-cap businesses with turnover below £100m per annum.

The importance of mid-cap businesses to the UK economy was recently highlighted in the British Business Bank's Small Business Finance Markets Report 2015/16, which showed that there are around 10,000 mid-cap businesses in the UK, contributing £875bn turnover and employing 4.5 million people. The report also demonstrated the increasing importance of debt funds as a source of finance, particularly for mid-cap businesses.

Structured Finance

SF traders among highest paid

Structured credit and exotics traders are the highest paid in their profession in London, according to survey results from Emolument.com. The results - which cover traders at director level - reveal that they take away an average of £370,000 a year, split equally between their salary and bonus.

In contrast, flow credit traders expect to take home less, at around £295,000 a year. Of this, £175,000 comes from the base salary.

Emolument.com explains that its overall results present a correlation between the complexity of the product traded and the average salary of a London trader. It notes that trading in exotics and structured credit requires sophisticated and technical traders to tackle the highly intricate products, hence the higher earnings.

In contrast, it points out that lower salary range trading areas, such as flow credit, are seeing higher numbers of redundancies. This is due to banks succumbing to pressure to adopt new automated solutions as part of their cost-cutting approaches.

CDO

Trups defaults, deferrals fall

The number of combined defaults and deferrals for US bank Trups CDOs decreased from 17.4% at the end of February to 17% at the end of March, according to the latest Fitch index results for the sector. Last month, eight banks representing US$108.5m of notional in 17 CDOs cured.

A defaulted issuer with a combined notional of US$27m in two CDOs was sold with a realised weighted average recovery of 7%. However, one bank with a total notional of US$11m in three CDOs began deferring for the first time and two other issuers, also with combined notional of US$11m in three CDOs, re-deferred. One issuer representing US$2.5m of collateral in one CDO was closed by the FDIC and marked as defaulted in Fitch's bank Trups universe.

Across 74 Fitch-rated bank and mixed bank and insurance Trups CDOs, 228 defaulted bank issuers remain in the portfolio, representing approximately US$5.2bn of collateral. As of last month, 97 issuers are deferring interest payments on US$1.2bn of collateral compared to US$1.7bn a year earlier.

CDS

Peabody auction due

An auction to settle the credit derivative trades for Peabody Energy Corporation CDS is to be held on 4 May. ISDA's Americas Determinations Committee ruled that a bankruptcy credit event occurred with respect to the entity on 13 April, after Peabody Energy Corporation filed for Chapter 11 bankruptcy protection in the US Bankruptcy Court for the Eastern District of Missouri. The auction settlement date is 9 May.

CLOs

CVC CLO stake sold

Electra Partners has made a £19m investment in CVC Credit Partner's Cordatus Loan Fund VI. The €400m CLO is backed by leveraged loans issued by predominantly private equity-backed companies in Europe.

The transaction has a 13-year life and will be invested in approximately 100 individual credits. Electra's investment is a majority interest in the CLO's equity and was made through subsidiary Electra Private Equity.

Electra managing partner Alex Fortescue and investment director Owen Wilson are responsible for the firm's investment in Cordatus VI. It is the second CLO fund in which Electra has invested, following a £13m injection into Tymon Park CLO late last year (SCI 22 December 2015).

CLOs

CLO default risks amp up

US CLOs are becoming more exposed to the rising number of defaulted issuers, according to Fitch's latest index results for the sector. The exception are triple-A rated tranches, which should remain shielded from potential downgrades.

Approximately 70% of 233 deals in Fitch's index had exposure to at least one defaulted issuer in 1Q16, with 16% exposed to at least three defaulted issuers. The number of CLOs with exposure to defaults increased to 159 from 97 in the previous quarter.

In addition, the notional of defaulted collateral is now at US$787m, or 0.64% of the aggregate index portfolio. This is an increase from US$392m, or 0.35%, at the end of last year. Loans that Fitch have labelled a concern within its index have also inched up to 9.6% of the aggregate portfolio from 8.4% at the end of last year.

Recent lower loan prices have allowed CLO managers to add to the deals' par. However, this was outweighed by the haircuts on the increasing exposure to defaulted obligations and excess triple-C notes for some 2013 to 2014 deals. Fitch notes that three CLOs in its index were failing their interest diversion test at the end of Q1, while another four have less than a 1% cushion.

In contrast, senior CLO 2.0 notes should remain resilient in the face of rating downgrades. Collateral losses to date - as well as projections - are well below the triple-A stress levels applied at the time by Fitch.

The agency says further losses should be deterred by strong credit enhancement levels, along with the operation of both collateral quality and coverage tests. Most CLOs in the index are still in their reinvestment periods, allowing CLO managers to add par. Fitch reviewed 79 CLO transactions in 1Q16, affirming and assigning stable outlook to the notes of all reviewed transactions.

CMBS

Conduit CMBS LTVs decline

The credit quality of US conduit/fusion CMBS as measured by Moody's LTV (MLTV) ratio improved in 1Q16, says the rating agency. The MLTV ratio declined from 118.9% in 4Q15 to 118.1% last quarter, marking the first decline since the start of 2013.

"The credit pendulum swung in favour of subordinate bond buyers late last year, and increasingly they are helping to shape conduit pools," says Moody's CRE research director, Tad Philipp. "For their part, issuers appear to be exercising greater underwriting discipline."

Underwritten LTV dropped from 65% to 64%, with fewer loans originated at or near 75% LTV. Property price appreciation has cooled, which could further boost credit.

Moody's says the cashflow haircuts it assesses have doubled since 2012 and now top 10%. Conduit loan coupons have trended up since 2Q15, but are still lower than they were during the late stages of CMBS 1.0. Loan coupons during 2006 and 2007 - the vintages that now comprise the refinancing wave - were typically about 6%, approximately one percentage point above current levels.

Moody's says its natural Aaa assessment averaged about 27% and that for three of the 11 transactions it rated the assessment went above 29%. This means there is little to no difference in probability of default risk between the super senior class and AM/AS class.

CMBS

Release pricing risks underlined

CMBS investors could be exposed to greater idiosyncratic property risk as a result of innovations around release pricing. According to Fitch, commercial property lending has seen traditional release pricing mechanisms become modified to favour borrowers.

This pricing structure governs how much debt borrowers must repay if they dispose of individual properties over the term of the loan. Lenders traditionally require a fixed, pre-determined portion of the loans to be repaid on the sale or release of a property. This ensures deleveraging, while avoiding exposure to a rump of lower quality properties.

However, recent innovations within release pricing structures have come as a result of increased competition among lenders. This has provided borrowers with the ability to reduce release prices of remaining assets after property sales. Fitch explains that this slows deleveraging and may even lead to partial reversal of prior deleveraging.

Where such innovation has appeared, debt structures have incorporated countervailing features that limit the portfolio owner and/or junior bondholder's ability to prolong returns. This protects senior noteholders against excessive portfolio concentration.

Nonetheless, Fitch believes that borrower-friendly release pricing structures could be reproduced in future CMBS deals. The agency warns that such structures may emerge where less attention is paid to the suitability of the structure in line with its underlying collateral.

For properties that rely on a particular occupier or sector to sustain their value, this could leave CMBS investors exposed to greater idiosyncratic risk following property disposals than was apparent in the initial portfolio. In turn, Fitch notes that this will undermine the benefit of portfolio diversity.

CMBS

Special servicing transfers diverge

Approximately US$15.1bn across 977 US CMBS loans was specially serviced at end-1Q16, compared to US$22.5bn across 1,219 loans at end-1Q15, Fitch reports. While the balance of specially serviced CMBS 1.0 loans has fallen to US$14.4bn from US$22.3bn between 1Q15 and 1Q16, the balance of CMBS 2.0 loans transferring to the special servicer has increased to US$693m from US$242m.

In 1Q16 alone, seven 2.0 loans (totalling US$155m) were transferred to the special servicer, compared to 11 loans (US$202m) in 2015 and five loans (US$51m) in 2014. The 2.0 transfers were due to various factors, including idiosyncratic risks centred on sponsor or tenant issues, although the most recent transfers have been due to the impact of lower oil prices in energy dependent regions (SCI passim).

Of the total loans in special servicing, nearly 30% (US$4.3bn) remains performing, with the borrower continuing to keep debt service current. Performing specially serviced 1.0 loans fell to US$3.9bn from US$4.8bn between 1Q15 and 1Q16, while performing specially serviced 2.0 loans increased to US$458m from US$164m over this same period.

Office and retail were the top property types in both CMBS 1.0 and 2.0 across all specially serviced loans, as well as the performing specially serviced loans. Office and retail comprised 46% and 33% respectively of the performing specially serviced 2.0 balance, and 28% and 31% respectively of the performing specially serviced 1.0 balance.

Over 55% of the total performing specially serviced 2.0 balance is concentrated across four loans: US$94.2m Gateway Salt Lake (securitised in JPMCC 2010-C1), US$81.5m Matrix Corporate Center (MSBAM 2013-C11), US$49.4m Hudson Valley Mall (CFCRE 2011-C1) and US$46.5m Georgetown Center (MSCI 2011-C2). The remaining 27 CMBS 2.0 loans are all sized at less than US$20m, the majority of which are secured by office properties (accounting for US$83m across seven loans) and hotel properties (US$57m across seven loans). North Dakota concentration consists of four loans worth US$27m on two multifamily properties and two hotel portfolios.

CMBS

CMBS defeasance driving up

US CMBS defeasance activity in 2015 reached record levels for the post-crisis era, according to Moody's. In total, activity rose to US$22.4bn in 2015, a 7% increase over the US$20.9bn in 2014 and the highest figure since 2007.

Moody's says that the rise in activity was a result of borrowers looking to capitalise on low interest rates and complete refinancing ahead of the wave of 2006 to 2007 loans set to mature on their 10-year period. However, the agency highlights that current spread volatility could impinge on refinancing this year, which would also have a knock-on effect on defeasance activity.

Last year's activity fell in between 2005 levels of US$21.2bn and 2006 levels of US$25.9bn. After a strong 1Q16, Moody's expects defeasance activity to stabilise during the remainder of the year to ultimately reach or slightly exceed the 2015 figure.

"The CMBS loan origination market is reacting to current spread volatility and looming risk retention rules," says Gregory Reed, a Moody's vp and senior credit officer. "So, despite the large number of loans approaching maturity amid general improvement in CRE markets, the volume of defeasance activity ahead of 2016 and 2017 maturities remains uncertain."

Loans with remaining terms of one year or less accounted for 62% of defeasance activity in 2015. Those with five or more years before maturity also increased, rising to 10% of defeasance in 2015, compared to 5% in 2014 and 1% in 2013.

"The CRE property markets have recovered from the financial crisis to such an extent that when combined with sustained low interest rates, defeasance remains an attractive option, even if a loan's maturity is years away," adds Reed.

As they did in 2014, office loans accounted for the majority of 2015 defeasance activity by balance, at 35% versus 34% the year before. After the office sector, multifamily (33%), retail (15%), hotel (10%), other (5%) and industrial (2%) accounted for the next largest shares of defeased loans by balance.

The top 10 largest loans that defeased in 2015 made up 17% of total 2015 defeasance activity, compared to 20% in 2014 and 23% in 2013. Further, the major markets of New York and Boston accounted for eight of the top 10 defeased loans.

CMBS

CMBS loan drops examined

Kroll Bond Rating Agency has published a report that provides insight into the nature of changes that occur to US CMBS loan pools during the securitisation process. Many of these changes are in the form of loan 'drops' - loans that don't make the cut for a variety of reasons, including B-piece buyer kick-outs, or in instances where borrowers turn to alternative funding sources.

In its analysis, KBRA examined 105 of its rated transactions from 2013 to 2015 and focused on loans that were removed from 41 conduit deals. Among the key findings is that the proportion of the pool balance that is subject to change has been rising since 2013. Small and medium-sized loans were removed more than twice as much as loans with principal balances of US$50m or larger.

Further, tertiary market loans were removed more frequently than primary market loans. Loans secured by industrial and multifamily properties had the highest removal rate.

Loans originated by non-bank lenders were removed more frequently than loans originated by banks, and the removed non-bank loans were more highly leveraged. Nearly two-thirds of the loans were unfunded at the time of preliminary feedback and unfunded loans were removed more than twice as much as funded loans.

More than one-third of the dropped loans were not securitised as of 31 March 2016. Some dropped loans reappeared in multiple pools.

NPLs

NPL definitions mooted

The Basel Committee has issued for consultation a document entitled 'Prudential treatment of problem assets - definitions of non-performing exposures and forbearance'. The proposed definitions aim to harmonise the measurement and application of two important measures of asset quality and thereby promote consistency in supervisory reporting and disclosures by banks.

At present, banks categorise problem loans in a variety of ways and there are no consistent international standards for categorising problem loans. The first proposal addresses the definition of non-performing exposures and introduces criteria for categorising loans and debt securities that are centred around delinquency status (90 days past due) or the unlikeliness of repayment.

It also clarifies the consideration of collateral in categorising assets as non-performing. Additionally, the definition introduces clear rules regarding the upgrading of an exposure from 'non-performing' to 'performing', as well as for the interaction between non-performing status and forbearance.

The second proposal addresses forbearance, which refers to concessions - such as a modification or refinancing of loans and debt securities - that are granted due to a counterparty's financial difficulty. The proposed definition sets out criteria for when a forborne exposure can cease being identified as such and emphasises the need to ensure a borrower's soundness before the discontinuation.

The Committee says the proposed definitions complement the existing accounting and regulatory framework in relation to asset categorisation. They are intended to be used, for example, in the supervisory monitoring of a bank's asset quality as well as by banks in their credit risk management and as part of their internal credit categorisation systems.

Comments on the proposals are invited by 15 July.

Risk Management

SEC adopts OTC conduct standards

The US SEC has adopted final rules implementing business conduct standards and chief compliance officer requirements for security-based swap dealers and major security-based swap participants. The final rules are adopted under the Dodd-Frank Act.

The rules require security-based swap entities to comply with a range of provisions designed to enhance transparency, facilitate informed customer decision-making and heighten standards of professional conduct. Security-based swap entities are required to communicate with potential counterparties in a fair and balanced manner, disclose material information about the security-based swap - including material risks, characteristics and conflicts of interest - and to adhere to other professional standards of conduct.

There will also be additional requirements for dealings with special entities, such as municipalities, pension plans, endowments and similar entities. As well as establishing supervision and chief compliance officer requirements, the rules also address the cross-border application of these requirements and the potential availability of substituted compliance.

The final rules will become effective 60 days after publication in the Federal Register. These rules also establish a separate compliance date, which generally is based on the compliance date of the registration rules for security-based swap entities.

RMBS

ATR claims 'non-existent'

Fitch says that borrower claims against major US residential mortgage servicershave been non-existent, two years after the Ability to Repay (ATR) rule was implemented. However, the agency says this trend could shift with certain non-qualifying mortgages (non-QM) becoming more commonplace.

The ATR rule was brought in to help protect borrowers from harmful lending practices. Under the rule, mortgage lenders must make a reasonable effort to determine if a borrower has the ability to repay the mortgage before the loan is made. ATR mandates a repayment analysis for closed-end mortgage loans and prohibits certain loan terms and conditions.

Fitch explains that the lack of borrower claims to date is unsurprising, as most loans meet the definition of QM and receive safe harbour protection from the ATR rule. In the non-agency sector, few non-QM loans have so far been securitised. Fitch identified that, of the 10,000 loans included in rated newly originated mortgage pools since 2014, only 14 have been classified as non-QM and are therefore vulnerable to ATR claims.

Of the small fraction of loans not eligible for safe harbour, a combination of tight underwriting and a supportive economic environment has kept default rates low. In the newly originated Fitch-rated mortgage pools issued since the start of 2014, only three loans are currently more than 60 days delinquent. The agency also observes that default rates on non-QM loans not securitised have been very low.

Because Fitch expects ATR claims to generally only occur after a default, lower credit quality or non-appendix non-QM loans with a higher default risk may have a higher probability of a successful claim. Therefore, the agency is likely to apply increased loss expectations for these loans.

Non-QM origination volume for these products does appear to be growing and could become more common in the future. Fitch updated its non-QM criteria last month for analysing the claim likelihood for loans with these risk characteristics.

RMBS

High costs hit non-bank servicers

Of the three largest US non-bank mortgage servicers - Nationstar, Ocwen and Walter Investment Management - only Nationstar was profitable in 2015, Moody's reports in its latest Servicer Dashboard. With increased regulatory scrutiny set to keep operating costs high, the rating agency believes earnings will improve only marginally this year.

Nationstar's net income was just US$43m in 2015. Moody's analyst Warren Kornfeld comments: "Concurrently, all three non-bank servicers' reliance on confidence-sensitive, short-term funding heightens their liquidity and refinancing risk, while Walter faces the additional challenge of a weak capital position."

Profitability has suffered over the last two years, primarily due to mortgage servicing right fair value adjustments and goodwill impairments, along with higher regulatory expenses. Ocwen and Walter Investment Management have both seen operating costs rise as a percentage of revenues, while Nationstar's costs have been steadier.

Moody's also notes that subprime collections metrics continued to improve for all US mortgage servicers in the final quarter of 2015. Wells Fargo Bank performed best in subprime, while CitiMortgage led in prime and Alt-A. In addition, the ongoing improvement in the economy contributed to declines in new delinquencies and roll rates, most notably for subprime loans.

Total cure and cashflowing metrics improved slightly or remained flat for all product types in 4Q15, and Nationstar and Ocwen continued to have a higher level of loss mitigation than their bank peers. Modification re-default rates remained flat or improved slightly.

Meanwhile, missed payment to foreclosure referral timelines remained high for bank mortgage servicers - on average more than two years for subprime - against less than a year for the non-bank servicers.

RMBS

FNMA brings fresh CIRT transaction

Fannie Mae has completed its tenth Credit Insurance Risk Transfer transaction. CIRT 2016-3 shifts a portion of the credit risk on a pool of single-family loans with an unpaid principal balance of approximately US$5.7bn to a single insurer.

The covered loan pool consists of 30-year fixed rate loans with LTV ratios greater than 60% and less than or equal to 80%. Fannie Mae acquired the loans in May and June 2015.

The GSE retains risk for the first 50bp of loss. Should that US$28.5m retention layer be exhausted, the insurer would cover the next 250bp up to a maximum coverage of approximately US$142.3m.

Fannie Mae has transferred a portion of the credit risk on US$634bn in single-family mortgages through its risk transfer efforts, including CIRT and CAS transactions. Rob Schaefer, credit enhancement strategy and management vp at Fannie Mae, comments: "We continue to see strong interest from insurers and reinsurers in our CIRT programme and look forward to pursuing additional opportunities to transfer risk to these parties in the future."

RMBS

RMBS hit by error

Moody's has downgraded an RMBS Mexican certificate after correcting an error in its cashflow modelling for the transaction. BRHSCCB 05U suffered the downgrade after the agency originally made an incorrect assumption that the deal was still protected through a partial credit guarantee (PCG).

The PCG covers interest and principal payments, thus increasing the available credit enhancement on the deal. However, the PCG is already depleted, leading Moody's to lower BRHSCCB 05U to a Caa2 rating from B2.

If not for the error, the agency explains that it would have included the deal among the Mexican RMBS transactions placed on watch in December 2015. This move follows its implementation of the MILAN methodology for its surveillance of the asset class (SCI 9 November 2015).