Contents

ABS

Mobile phone EIP ABS mooted

As the business model of US wireless carriers moves to further embrace equipment instalment plans (EIPs), they become more likely to issue ABS, says Moody's. Verizon has publically stated its interest in securitisation and there is increased speculation that a deal could be on the cards.

"We have actually been out there talking to rating agencies, we did a presentation at the ABS conference in Las Vegas [in March]. We have been talking to the bondholders," Fran Shammo, cfo, Verizon, recently told a Deutsche Bank conference.

Wireless carriers are moving away from subsidising customer phone purchases in exchange for two-year service contracts in favour of offering financing contracts, such as zero-interest EIPs. Carriers have already used receivables from financing contracts as collateral for borrowing, but securitisations could help diversify funding sources, lower borrowing costs and lock in longer-term financing.

Shammo notes that the efficiency benefits of securitisation are a strong draw. "It is a lower cost of capital," he says, "so that is something that we are still exploring and we have looked at that and talked to the rating agencies about." Shammo adds: "We are still working through all those mechanics."

Mobile phone ABS credit considerations would be similar to those for ABS secured by other consumer loans, such as borrower creditworthiness, operational risks and deal structures, says Moody's. The rating agency notes that there would also be some specific strengths, because mobile phones represent such an essential part of Americans' daily lives.

However, as a new consumer lending sector without extensive historical data, there would also be some unique risks. These include the fact that single billing statements and other features that create links between the financing and a consumer's wireless service also create links between the borrower's willingness to remain current and the quality of a carrier's performance in its traditional business or its financial health.

Moody's has rated more than 60 securitisations of Japanese consumer loans for purchasing mobile phones since 2007. While US deals would not be quite the same, there are useful parallels to be drawn and it is worth noting that Japanese deals have achieved Aaa ratings at issuance. All of the Japanese mobile phone ABS have performed within Moody's expectations and none have been downgraded.

JL

Structured Finance

Marsh recruits risk pro

Marsh has hired Abbey Sturrock for its political risk and structured credit practice, serving as svp within the firm's public agency group. In this role, Sturrock is responsible for delivering Marsh's advisory and placement capabilities for the public agency sector across the globe, working with entities such as multilateral development banks and export credit agencies. She joins from Berne Union, where she served as a director.

CLOs

BlackRock names CLO head

Josh Tarnow is taking over as head of BlackRock's CLO and bank loans business. This comes after Leland Hart's decision to step down from these roles to pursue other interests.

A structural reorganisation within BlackRock's bank loans team in the US back in March 2015 saw it place Scott Snell and Adrian Marshall in charge of the day-to- day responsibilities of the CLO and bank loans businesses, reporting to Hart. This structure will stay in place, with both now reporting to Tarnow.

Marshall is currently md for BlackRock and a portfolio manager on the bank loans team. Snell is a portfolio manager in the firm's bank loans portfolio team, specialising in CLO secondary and new issue securities.

BlackRock says that Hart will maintain an advisory role in the coming months for its infrastructure debt operations.

Insurance-linked securities

Kane platform rebranded

Artex Risk Solutions has rebranded the insurance management operations it recently purchased from Kane under the new name of Artex SAC. The acquisition of the platform was made in late 1Q16 as part of Artex's drive to increase its ILS capabilities in Cayman and Bermuda (SCI 22 March). The platform was built as the vehicle for Kane's private ILS and catastrophe bond transactions, and will continue to run as such under the Artex brand.

Insurance-linked securities

TigerRisk builds ILS trading capability

TigerRisk Capital Markets & Advisory has received FINRA approval to trade catastrophe bonds in the secondary market. This will be led by Patrick Gonnelli, who becomes global head of ILS distribution and trading.

Gonnelli has been at TigerRisk for six years and has also worked at firms such as RK Carvill and Willis Re. Parent company TigerRisk Partners added a global head of ILS and capital solutions in April (SCI 19 April).

Insurance-linked securities

Securitisation leader named

Hannover Life Reinsurance Company of America (Hannover Re US) has promoted Dale Mensik to svp, financial solutions. He will lead the firm's financial reinsurance and securitisation efforts for the US life insurance market. Mensik has been at Hannover Re US for four years, having previously worked at Deutsche Bank.

Risk Management

Matching product launched

Sapient Global Markets had launched RegRecon, which is intended to enhance matching, reconciliation and resolution for regulatory reporting. It will be available as a standalone solution or as part of the CMRS reporting platform.

RegRecon will provide automated trade matching and reconciliation, break management, and resolution workflow. It is intended to help firms to minimise reporting costs and deliver greater control over the whole reporting process.

"Many of the traditional ways of working with data, particularly in post-trade processing for trade reporting and portfolio reconciliation are inconsistent and uneconomic, posing a significant compliance risk," says Arun Karur, vp, Sapient Global Markets. "RegRecon enhances operational processes through enhanced automation and efficient, seamless reconciliation workflow. It provides deeper insight in to all trade discrepancies and simplifies resolution tracking of all changes and messages between the middle-office and counterparties."

ABS

Card ABS near record levels

US credit card ABS performance is still hovering close to record territory, according to Fitch's latest quarterly update for the sector. Charge-offs edged up from 2.52% to 2.65% in 1Q16, but still stayed below the 2.75% mark for the third consecutive quarter.

Credit card delinquencies also began to normalise, with late pays rising slightly to 1.05% in 1Q16. However, this rate is still well below historical averages.

Average monthly payment rates hit a record high of 29.8% for the January distribution period. These rates have remained high since early-2014, with 1Q16 performance roughly 36% higher than the historical index average of 17.91%.

Fitch accredits this to the continued diligent and proactive approach taken by US cardholders paying down on their balances. In addition, three month excess spread also set another record high last quarter, reaching 14.2% for the January distribution period.

ABS

China vehicle guidance assessed

China's new guidance on used vehicle sales will have a mixed impact on the recovery rates in auto loan ABS, says Moody's. However, the agency believes it will boost the used car market overall.

The China State Council's new guidance on facilitating the ease of inter-city and inter-provincial used vehicle sales kicks in on 31 May. The rules will scrap current restrictions in most of the 299 cities that have them in place. These restrictions currently prevent vehicles in one city or province from being sold in another if they do not meet the minimum emission standards of the new market.

"The new guidance will result in lower recovery rates on auto loans in cities and provinces where there will be a net inflow of vehicles, a credit negative for auto ABS that include auto loans from affected regions," says Elaine Ng, vp and senior analyst, Moody's.

Ng notes that the vehicle influx will push down used vehicle prices. This will then lead to lower recovery rates when vehicles are sold to repay defaulted auto loans, but the impact is still expected to be limited.

"In particular, we believe the prices of lower emission standard or older vehicles that do not meet the most stringent China V emission standard will come under most pressure, because the greater supply of used vehicles that stems from the new guidance will give buyers a wider selection of used vehicles," adds Georgina Lee, avp, Moody's.

These factors could also have a knock-on effect on the prices of new vehicles below the China V standard. With more options for budget-conscious buyers, they may be tempted to lean towards the wider selection of lower priced used vehicles - particularly where the offer lower age or mileage.

However, there are also certain cities and provinces that have been excluded from the new guidance, including a select nine cities in Guangdong Province, as well as Zhejiang, Jiangsu and Beijing. In these cities, Moody's says that used vehicle resale values and prepayments rates on auto loans will rise, which is a credit positive.

The agency expects that these locations will likely become net suppliers of used vehicles as they also have higher levels of vehicle ownership and more active used-vehicle markets than the other regions that have been excluded. The greater outflow of used vehicles from Guangdong, Zhejiang, Jiangsu, Hebei and Beijing will allow used-vehicles to be sold at a higher price thereby pushing up recovery rates.

ABS

Subprime auto concerns surfacing

The recent 20-year high in US subprime auto ABS delinquencies is not the main concern for investors in the asset class, according to Fitch. The agency says that the influx of new deals from less established names is a more profound issue right now.

Investors are apparently concerned that these new deals are intensifying competition too much, which adds to worries that some of the new independent finance companies may struggle to fund their servicing platforms. Additional questions surround their ability to adhere to their own underwriting policies and the expected response of these new dealers when responding to the rigour of current regulatory scrutiny.

Although Fitch acknowledges the serious nature of the recent delinquencies surge in the subprime sector, it notes that it is still a fraction of the total number of subprime auto loans that are being originated. That said, much of the weaker subprime auto ABS performance stems from many of the newer players that the agency has flagged, of which most had never securitised prior to the last couple of years.

The most established subprime auto originators, such as AmeriCredit and Santander, make up less than half of Fitch's subprime auto ABS index today. This is compared to over 90% back in 2009-2010.

The remainder of the composition consists of newer companies. Many have to rely on ABS more exclusively for their funding, which, coupled with a softening wholesale market, may contribute to higher subprime auto losses in the coming months.

ABS

Lawsuit 'credit negative' for ABS

A lawsuit filed against Lending Club is credit negative for ABS backed by consumer loans originated through online platforms using a partner bank model, says Moody's. While filed against Lending Club specifically, the outcome of the case could have wider consequences for ABS backed by marketplace loans originated by a range of platforms.

The case, Bethune vs LendingClub Corporation et al., filed last month, alleges that Lending Club violated New York usury laws by issuing a loan exceeding the state's usury limits. The agency suggests that if this case and others like it are successful, it could lead to interest rates lowered on loans or loans deemed void or unenforceable, which could adversely affect cash flows on these loans or ABS backed by them.

While the rating agency has not rated ABS backed by Lending Club's loans, it has rated others that could be affected if the case creates legal precedents or prompts similar lawsuits from borrowers with loans originated through other platforms. Platforms might be unable to service loans or fulfil their obligation to repurchase loans. This should however be limited by effective back-up servicing arrangements.

Additionally, Moody's states that such lawsuits can be credit negative even with positive outcomes. This is because they underscore the extra time and resources that platforms will need to defend themselves against legal challenges.

Moody's highlights that the outcome of the Midland vs Madden case could have implications for Bethune. It could strengthen the case by sustaining or expanding precedent that suggests state usury laws can apply once a bank sells a loan and no longer retains an interest in it.

However, the Bethune lawsuit limits the proposed class to individuals who received a Lending Club loan before the platform and its originating bank, WebBank, restructured their loan origination model in February. This limitation highlights the benefit of the new arrangement which reduces, but does not eliminate, the risks of a marketplace lender's loans being subject to state usury laws.

Structured Finance

ABCP stays stable

US ABCP conduit collateral compositions, credit quality and performance measures remain strong and transaction structures are robust, says Fitch. ABCP conduits remain a significant source of funding for banks.

Fitch affirmed 17 US ABCP programmes last month. Outstandings across those 17 programmes totalled US$102bn. Auto and commercial, trade receivables, credit cards and student loans account for most of the conduit holdings. Facility utilisation rates across the portfolio were up from last year at 69%.

Fitch's credit outlook for US ABCP for the remainder of 2016 remains stable.

Structured Finance

Spanish synthetics on the cards

Moody's suggests that synthetic securitisations could become more popular for Spanish banks looking to bolster their capital buffers. With regulatory pressure building on lenders, many may see synthetics as a complement to tapping the equity market or retaining earnings.

"Northern European players have dominated Europe's synthetic market so far, with the most recent deals originated by banks in the UK, Germany and Austria," says Gaston Wieder, vp at Moody's. "However, Spanish banks are well positioned to strengthen their capital ratios through the synthetic securitisation of SME loans. Spain is Europe's largest SME securitisation market, originating a quarter of all SME deals by volume."

Public authorities are urging banks to lend more to SMEs to boost economic growth, while regulators are pushing for them to hold larger capital buffers. As a result, Moody's says that synthetics could help achieve both aims, which would offset where their respective aims are seemingly at odds.

Spain's Banco Santander and Caixabank launched two synthetic deals to free up capital. These trades cover €4.3bn of loans granted to SMEs, and were the first synthetic deals in Spain since the peak of the financial crisis.

The transactions could be seen as a marker for a shift to use securitisation as a tool to strengthen capital, rather than just to raise funding. Synthetics are considered simpler than true-sale securitisations, thus providing a more efficient option. Spanish banks in general also have strong experience in securitising SME loans, counting with a strong infrastructure, solid underwriting and collection systems.

Structured Finance

Argentina headwinds outlined

Tighter economic policies implemented by Argentina's newly elected government could prove challenging to securitisations within the country, according to S&P. This adds to the agency's worries that inflation, higher interest rates and stricter underwriting standards could suppress both issuance and borrowing.

A projected slowdown in GDP growth for Argentina is based on the government's new economic policies, with originators responding by tightening their underwriting policies and collections procedures. Increasing interest rates could also be problematic for lenders, as it leaves them constrained to access affordable financing sources.

This cost will likely transfer over to obligors, who could become more reluctant to take out loans at higher rates. As a result, S&P says that origination for new credits related to consumer assets should decrease.

The agency's performance predictions are more mixed for other transaction types. New regulations may play into the hands of fostering origination for personal loans, but higher unemployment in the country remains a concern for payment rates.

In addition, rising interest rates means that higher delinquencies remain a possibility in credit card receivables-backed deals, but the short term nature of trade receivable deals leave them less susceptible. Meanwhile, mortgage origination remains low, leaving S&P to project no new deals out of this sector this year.

Nonetheless, issuance volume in 1Q16 was greater compared with the same quarter last year, rising to US$500m from US$429m. This is a trend that could possibly be maintained, despite the aforementioned headwinds.

The agency also says that the diversity of transaction pools in Argentinian deals could be the key mitigant to possible credit deterioration it outlines. Going forward, it says that less standardised structures will continue to emerge, along with the securitisation of new assets and longer liability terms.

CDS

CDS market still shrinking

The steady reduction in the size of the global CDS market continued in 2H15, according to the BIS. The notional amount of outstanding CDS contracts fell from US$15trn at end-June 2015 to US$12trn at end-December, a figure which is only one fifth of its peak of US$58trn at the end of 2007.

The market value of CDS also continued to decline, dropping to a gross figure of US$421bn at the end of last year and US$113bn in net terms. The BIS says that the decline in CDS activity is a reflection of the contraction of the inter-dealer segment. The notional amount for contracts between reporting dealers fell from US$6.5trn in June of last year to US$5.5trn at the end of December.

Meanwhile, central clearing continued to make inroads with the share of outstanding contracts cleared through CCPs rising from less than 10% at mid-2010 to 26% at end-2013 and 34% at end-December 2015. The share cleared through CCPs is highest for multi-name products, at 42%, and much lower for single name products, at 28%.

Finally, the distribution of outstanding CDS by location of the counterparty showed little change in the BIS's findings. CDS with counterparties from the country in which the dealer is headquartered accounted for only 24%, or US$2.9trn, of outstanding contracts at end-December. Most of the foreign counterparties were from Europe, followed by the United States.

CLOs

Post-crisis CLO returns keep momentum

The total amount of CLOs that paid down in JPMorgan's CLO Index (CLOIE) in April was US$3.54bn in par outstanding, split between US$2.92bn of pre-crisis CLOs and a further US$620m in post-crisis deals. The post-crisis index added an additional US$2.2bn at the April rebalance, spread across 30 tranches and six deals.

The return on the CLOIE Total Index stood at 1.2% for April. Every tranche experienced positive returns, which is the first time for almost a year, having previously happened in May 2015.

The highest post-crisis performers were triple-B, double-B and single-B tranches, which posted respective total returns of 5.81%, 4.91% and 3.72%. The double-B and triple-B tranches are also leading in year to date returns at 1.9% and 2.21% respectively, while double-As are returning 1.84%. In addition, double-B indices have returned 18.9% since February.

In contrast, pre-crisis CLOs are underperforming after the rally in April, returning overall 0.28%, below the post-crisis return of 1.32%. The top three performing pre-crisis tranches in April were the triple-B, double-B and single-A indices, which returned 0.61%, 0.43% and 0.38% respectively.

CLOs

Brexit risk to Euro CLO performance

The European CLO market has seen €4.44bn in new issuance this year, slightly above the €4.39bn up to the same point in 2015, despite volatility in the secondary loan and wider financial markets earlier in the year, notes S&P. It is also despite the potential for further volatility due to geopolitical events such as the Brexit vote.

CLO managers have been helped in pricing transactions by an increased presence of Japanese investors in search of yield. Superior cross-currency swap dynamics have enabled the European market to benefit more than the US market from this Japanese interest.

Some more creative structuring - either by removing the most expensive single-B tranche or splitting the equity tranche into senior and junior - has also helped, while other managers have amended reinvestment periods. The sustained CLO 2.0 issuance has increased manager eagerness to call 1.0 transactions, with three called in the first quarter.

Over the course of 2015, European CLO upgrades outnumbered downgrades by 192 tranches to 11. All triple-A tranches remained triple-A.

From December 2015 to February 2016, the percentage of defaulted assets has been mixed for all European CLO cohorts. The percentage of defaulted assets increased for the 2005 and 2006 vintages, but decreased for the 2007 and 2013 vintages. The 2014 vintage continues to register 0% defaulted assets.

Next month's Brexit vote could affect not just the UK, but the whole of Europe. S&P considers the risk of Britain leaving the EU to be 'elevated', although its baseline expectation is that the UK will remain in the union.

The UK is the fourth largest single collateral source for European CLO 2.0s, accounting for €1.95bn or 15.8% of the collateral. A further 25.9% of collateral comes from outside the EU, notably the US at 19.1%. Only 24% of the collateral from the UK was issued in pound sterling, with most in euros.

"It seems reasonable to conclude that the UK remains an important source of collateral for CLO managers, and that CLO managers are by no means restricting themselves to borrowers from EU countries. In addition, this data appears to demonstrate not only the importance of the euro as a currency to UK borrowers, but also their continuing ability to issue in pound sterling," says S&P.

The potential impact on CLO ratings is hard to quantify should the UK vote to leave the EU. While there would be initial volatility in the financial markets, S&P notes that there would also be longer term effects for the underlying collateral which would vary considerably by company and industry, with many of the decisive parameters unlikely to be determined until withdrawal terms are settled.

CLOs

Euro CLO equity returns impress

Overall European CLO equity returns have largely been as expected, according to a study by data and cashflow analytics firm Codean. Despite the global financial crisis, European CLO equity from the 2006 and 2007 vintages successfully "achieved what it said on the tin".

Although all deals are sold on the assumption that investors will make solid returns, not all deals achieve that. From the 2006 and 2007 vintages, 30% of deals hit targets of above 10% IRR, with 45% returning investors' money plus a little extra. Only 25% of deals caused investor losses.

Since 2H13, annualised cash-on-cash returns in the European CLO market have been in the 14%-16% range, ticking up to 15.7% in 2H15. Codean notes that only one in eight European CLOs is now not paying its equity, compared to four in seven at the height of the financial crisis.

CLOs

CLO 2.0 'more resilient'

Post-crisis European CLO triple-A ratings would avoid downgrades even if faced with stresses similar to those experienced during the height of the financial crisis, says Fitch. This is due to greater credit enhancement and improved portfolio homogeneity.

An analysis of Fitch-rated pre-crisis CLOs with similar collateral profiles to the new generation of transactions - including 190 tranches outstanding in 2007 - shows that none of the 34 senior triple-A rated tranches outstanding in 2007 were ever downgraded. Average credit enhancement was 37.5%, compared to an average of 41% for 2.0 transactions.

Pre-crisis junior triple-A tranches were downgraded, but almost exclusively to double-A. That rating migration was due to reasons such as methodology updates as well as performance deterioration.

The rating agency notes that pre-crisis CLOs with collateral profiles similar to CLOs 2.0 also performed well in terms of defaults. Only three tranches from the 26 comparable pre-crisis deals rated by Fitch defaulted.

CMBS

CMBS delinquencies up again

The US CMBS delinquency rate inched higher again in April, according to Trepp. It was the second consecutive month that the rate crept higher, following large decreases in January and February.

The delinquency rate for US CRE loans in CMBS is now 4.23%, up 1bp from March. The rate is 134bp lower than a year previously and 94bp lower than the start of 2016. The all-time high was 10.34% in July 2012.

CMBS loans that were previously delinquent but paid off either with a loss or at par totalled US$450m last month. Over US$600m in loans were cured. About US$1.1bn became newly delinquent.

By property type, the industrial delinquency rate increased 4bp to 5.95% and the lodging delinquency rate increased 11bp to 2.87%. The multifamily delinquency rate fell 2bp to 2.32%. The office delinquency rate jumped 7bp to 5.3% and the retail delinquency rate dipped 13bp to 5.2%.

CMBS

Macro issues affecting Brazilian MBS

Macroeconomic pressures on Brazil will continue to stress CMBS, says Fitch. Credit-linked CMBS will fall faster in 2016 than in 2015 and other CMBS sectors will also suffer, while RMBS deals should remain stable amid the declining residential market as most borrowers have benefitted from a rise in inflation and trusts have significant seasoning.

Fitch's Brazilian structured finance ratings have seen significant downgrades already, with seven downgrades to every one upgrade last year. As of January, 31% of the Fitch-rated portfolio had a negative outlook.

The continuing recession is expected to hit credit-linked CMBS particularly hard. Downgrades are expected to outnumber upgrades by 10 to one this year. The mall CMBS subsector will also likely weaken as unemployment rises and household income declines.

Risk Management

CFTC amends swap requirement

The US CFTC has approved a final rule to amend a requirement that swap dealers (SDs) and major swap participants (MSPs) exchange the terms of swaps with their counterparties for portfolio reconciliation so that SDs and MSPs need only exchange the 'material terms' of swaps. This requirement is found in CFTC Regulation 23.500(i).

The final rule also amends the definition of 'material terms' in CFTC Regulation 23.500(g). The final rule benefits SDs, MSPs, and their counterparties by enabling them to focus on reconciling data fields that impact swap valuation and counterparty obligations, without impairing the CFTC's ability to oversee and regulate the swaps markets.

Risk Management

MiFID 2 transparency changes proposed

ESMA has proposed amendments to its draft regulatory technical standards (RTS) for MiFID 2. These include revising transparency requirements to non-equity products, including structured finance and derivatives products.

The proposal is in response to the European Commission's request for ESMA to phase-in the application of certain parts of the new transparency regime by mitigating possible liquidity risks to bond markets. As a result, the transparency requirements would be applied at a gradual rate over a four year period.

The end of the phase-in period would see transparency compliance finally reaching the necessary requirements set out by the regulations. Consequently, this means that significantly fewer instruments than initially proposed would be subject to the real time transparency regime at the start of MiFID 2.

However, ESMA's proposal is different to what the Commission has outlined. The latter suggested that liquidity assessments be run on a yearly basis, after which ESMA would determine if the non-equity products subject to the assessment are worthy of upping their transparency requirements.

ESMA argues that the cautious approach should be replaced by a pre-determined, automated process. In its view, a prescribed stage in its RTS should be amended in case of significantly negative impacts on liquidity.

This could strip away any potential legal uncertainty created by non-equity products failing to meet transparency standards under the Commission's proposal. ESMA also argues that the Commission's proposal could lead to a lack of meaningful transparency improvement for many non-equity instruments, which would run contrary to MiFIR objectives looking to achieve this stated goal.

ESMA's other proposal will introduce commodity derivative position limits for MiFID 2. Alternatively, it can place caps on the number of commodity contracts that can be held, which will be set by national regulators. The latest proposals follow the Commission's decision earlier this year to extend the deadline for MiFID 2 compliance by firms to 3 January 2018 (SCI 11 February).

RMBS

Belgian resi delinquencies nudge up

The performance of the Belgian RMBS market remained stable in the six months to February, according to the latest indices published by Moody's. The trend for 90-plus day delinquencies increased slightly from 0.64% to 0.71%.

Cumulative defaults increased marginally from 0.39% to 0.46% as a percentage of original portfolio balance. Similarly, cumulative losses increased from 0.05% to 0.08% of the original balance but remain negligible.

Moody's rated one new Belgian RMBS - €800m Penates Funding Compartment PENATES-5 - during the six months. The 11 Belgian RMBS rated by the agency had an outstanding pool balance of €46.5bn as of February, marking a year-on-year decrease of 4.5%.

RMBS

Seattle MBS settlement agreed

Bank of America has agreed to pay a US$190m settlement to the Federal Home Loan Bank of Seattle regarding pre-crisis RMBS that it sold, according to its quarterly SEC 10-Q filing. The agreement resolves a six-year litigation battle between the two banks after it was finalised on 25 April.

The government-sponsored Seattle bank had argued in the case that Bank of America misstated and left out information on the quality of the underlying mortgages supporting the disputed transactions. The RMBS are part of Countrywide's portfolio of deals, which Bank of America inherited when it bought out the struggling firm in 2009.

RMBS

RPL RMBS hitting expectations

The early performance signals from US reperforming loan RMBS deals reveal that they have matched expectations, according to Fitch. Deals rated by the agency have in fact slightly exceeded performance in comparison to their non-rated counterparts, which has stemmed largely from the different underlying collateral risk attributes.

The rated RPL market has grown with more new issuers participating since the end of 2014. Fitch has rated all 12 RPL transactions that have come to market from four issuers through the end of March. Each deal has had extensive due diligence performed, including checks for compliance, tax and title searches.

"Non-rated RPL transactions appear to be more adversely selected with a larger presence of borrowers with weaker credit profiles," says Fitch senior director Suzanne Mistretta.

Non-rated RPLs are also showing lower average balances and higher delinquencies at issuance than the deals that Fitch rates. In contrast, as of the March remittance period, the aggregate percentage of loans at 60 or more days delinquent across all Fitch-rated transactions is less than 3%. Realised losses to date have also been generally negligible.

This has been due to a combination of the quality of the collateral, extensive due diligence and collateral file reviews, and the representation and warranty frameworks. According to Fitch, these have helped contribute to the strong performance trends for rated RPLs 12 months post-issuance.

RMBS

FNMA enhances CAS disclosures

Fannie Mae has made further enhancements to its loan level disclosure data for its Connecticut Avenue Securities (CAS) programme. From this month, Fannie Mae has expanded its relationship with Equifax to provide investors with monthly updated, anonymous, loan-level credit scores on all CAS deals since the programme's inception in 2013.

The information being made available was previously only available for the company's more recent actual loss CAS transactions. The additional information should enable investors to better monitor their investments in the programme and give greater clarity and details on the reference pools.

Meanwhile, the FHFA has increased the 2016 multifamily lending caps for Fannie Mae and Freddie Mac from US$31bn to US$35bn. The adjustment is consistent with the FHFA's 2016 scorecard for the GSEs, in which the FHFA committed to review the estimates for the size of the multifamily finance market each quarter and increase the caps if warranted. The FHFA notes that the adjustment is based on increased estimates of the overall size of the 2016 multifamily finance market.

RMBS

Goldman settlement gets approval

A US$272m settlement in one of the last remaining RMBS class action suits to come out of the financial crisis has been approved. Judge Loretta Preska of the US District Court for the Southern District of New York granted the settlement, which resolves a dispute over faulty pre-crisis RMBS pass-through certificates sold by Goldman Sachs.

The case, NECA-IBEW Health & Welfare Fund v. Goldman Sachs, involved the accusation that the bank made false and misleading statements to sell the RMBS certificates. The settlement between the parties was reached in August last year, but the court's approval now gives it final confirmation. The result follows seven years of litigation leading up to its conclusion after the Illinois-based NECA fund decided to sue Goldman Sachs back in 2008.

RMBS

Argentina RMBS set to emerge

Argentinean RMBS prospects could be boosted by the creation of a new inflation-adjusted accounting unit, says Moody's. The agency believes that the unit will help increase mortgage origination, but says the RMBS market will not reach its full potential until the national government can rein in inflation.

The Central Bank of Argentina recently announced the creation of the inflation adjustment unit, which will act as a benchmark for interest rates on mortgages and certain bank deposits. The new regulation constitutes the cornerstone of President Mauricio Macri´s campaign pledge to enable the origination of a million new home loans in the next four years.

Moody's says that adjusting loans for inflation will allow loan tenors to be longer and fixed interest rates to decline, which could translate into less stringent initial requirements for accessing a loan. However, default risk for this kind of instrument will likely increase in high inflation environments such as Argentina in its current state.

The unit will also shift the burden further from the lender to the borrower and specific risks could come in the form of mortgage payment shocks when salaries do not adjust accordingly with inflation. In the long term, Moody's points out that real wages can deteriorate too.

Nonetheless, the agency says that securitisations will most likely represent the primary means of funding for these new type of adjusted loans. However, Moody's believes that RMBS issuance denominated through this unit face different challenges that will limit demand from investors in the short- to medium-term.

A number of challenges still stand in the way of the market truly fostering. First, the country's normalisation of official statistics is still pending, after years of government inflation data being deliberately tampered with. Although a new consumer price index has been announced for June 2016, it might take time before financial market participants regain trust in government statistics.

Second, the new regulation needs a more solid legal framework in order to be sustainable in the long term. Specifically, the new accounting unit has been established by resolution of the central bank instead of by law. Moody's says it would typically seek a more stable legal framework for long-term lending.

RMBS

UK prime RMBS 'stable'

UK prime RMBS continues to perform in a stable fashion, according to Moody's latest index results on the sector. Between November and February, 90-plus day delinquencies increased slightly to 0.73% from 0.69%.

Meanwhile, outstanding repossessions remained at 0.02%. In the same period, cumulative losses decreased to 0.07%, which was mainly due to the termination of Granite Master Trust from the Moody's index. In addition, the annualised total redemption rate came in at 21.37% in February, higher than the 12-month average of 18.97%.

Moody's expects that the overall collateral quality for new UK RMBS will remain stable, given favourable economic conditions such as high GDP growth, low interest rates and low unemployment levels. The agency forecasts real GDP growth in the UK of 2.2% and 2% for 2015 and 2016 respectively.

RMBS

Aussie housing turns corner

Australian housing affordability deteriorated over the 12 months to the end of March, requiring homeowners to spend a larger proportion of their income on monthly mortgage repayments, reports Moody's. However, the positive news for RMBS is that rating agency believes the worst may be over.

Nationally, Australian households spent 27.6% of their monthly income to meet monthly mortgage repayments, up from 27.0% as of 31 March 2015. Perth was the only capital city where affordability did not deteriorate.

Sydney, at 35.6% of income, is the most unaffordable city, followed by Melbourne at 30%. Such deteriorating housing affordability is credit negative for new mortgage loans and for RMBS backed by such loans.

Moody's notes that conditions did begin to improve during 1Q16, suggesting that repayment costs may have peaked. Affordability actually improved for all Australian capitals during 1Q16, although not by enough to outweigh the deterioration in the nine months prior.

"The improvement over the three months to 31 March 2016 was driven by a pullback in housing prices. The Reserve Bank of Australia's (RBA) cut to official interest rates on 3 May 2016 will have a further positive influence on housing affordability, though the extent of this impact will ultimately depend on whether there are any flow-on effects to the housing market, where lower rates can put upward pressure on prices," says Moody's.