Contents

Secondary markets

Euro secondary slumbers again

Yesterday saw another sleepy start to the week for the European securitisation secondary market.

After a flurry of activity on Friday, the public holiday in Europe yesterday saw the whole market revert to the quieter pattern seen at the start of last week. Indeed, with many investors absent a CLO equity BWIC was postponed until Wednesday and flows across the board were very light. Consequently spreads were generally unchanged.

The highlight of the session was a Dutch RMBS that traded inside recent tights, pulling the whole sector with it. Such strong demand bodes well for the remainder of the week where the secondary supply pipeline is slowly building.

There are currently four BWICs on the European schedule today. They include a single line of CMBS, two small RMBS clips and five CLO seniors.

However, the largest list involves €29+m current face of ABS CDOs due at 15:00 London time. The four line auction consists of: FAB 2002-1 A2, PLLS II-X A2, RENOR 1 B and ZOO IV-X A1B. None of the bonds has covered on PriceABS in the past three months.

Secondary markets

US CLOs still becalmed

The US CLO secondary market remains becalmed this week so far.

After a fairly quiet end to last week, CLO BWIC activity is yet to get going this week with a conference in New York yesterday and today encouraging sellers to hold off until tomorrow. Indeed, Wednesday's auction calendar is already building strongly.

For today, there are currently no US CLO BWICs, but there is one US ABS and CRE CDO list due at 10:00 New York time. The eight line $15.8+m current face auction comprises: ACCDO 11A A, ACCDO 7A A, ACCDO 9A A, CBCL 15A A, CBCL 19A A1, CRCZ 2005-1A A, FAB 2006-1A A1 and LNR 2007-1A A. None of the bonds has covered on PriceABS in the past three months.

Secondary markets

Euro secondary strong but slow

Sentiment remains strong across the bulk of the European securitisation secondary market but away from CLOs activity remains very slow.

ABS/MBS secondary continues to be hampered by lack of supply as BWICs have remained thin on the ground this week. Meanwhile, flows are highly selective and almost exclusively dealer-driven.

There is more activity being seen in the CLO space, however. There, BWICs have continued to appear on a daily basis this week and some bilateral trading has been on the back of the auctions, though volumes remain light. 2.0 CLO secondary spreads across the capital structure are flat to slightly tighter on the week so far.

There are currently three BWICs on the European schedule for today. All exclusively focus on CLOs.

The largest is a 14 line €45.893m mezz list due at 14:30 London time. It comprises: ARESE 7X D, AVOCA 13A F, CGMSE 2015-2X E, CGMSE 2015-3X C, CORDA 5X E, DRYD 2013-27A D, DRYD 2015-39X E, GLGE 1X C, GLGE 1X E, GROSV 2013-1X D, HARVT 10X E, HPARK 1X D, JUBIL 2014-11X E and TYMPK 1X D.

Two of the bonds have covered with as price on PriceABS in the past three months, last doing so as follows: DRYD 2015-39X E at 87.21 on 22 March and GLGE 1X C at 99.56 on 28 April.

Secondary markets

US CLOs weaken

The late start to the week for the US CLO secondary market saw signs of weakness yesterday and tone will be tested further today.

"There's a little bit of caution coming back into the market as volatility creeps back into broader markets and consequently ours," says one trader. "We've got a large number of lists today, which may well start to shake things out."

The trader continues: "Yesterday people began to trickle back to their seats after the conference. As a result there were a number of lists for the first time this week and double- and triple-Bs headed a bit wider - for example, double-Bs with good MVOCs had been trading in the low-800s, but printed yesterday closer to a 900DM. There are a lot more bonds in for the bid today so we should get a better sense of whether or not there is a new tone to the market."

There are nine BWICs on the US CLO calendar for today so far. The largest is a seven line $36.25m collection of triple-Bs due at 12:30 New York time. It consists of: ANCHC 2015-7A D, CTWTR 2014-2A C, JFIN 2015-2A D, KVK 2015-1A D, MIDO 2015-4A D, ZCCP 2015-1A D and ZCLO3 2015-3A C. None of the bonds has covered on PriceABS in the past three months.

ABS

Groundbreaking SLABS hits

SoFi's second ABS of the year has hit the market, making it the ninth rated term ABS the online lender has completed. Dubbed SoFi Professional Loan Program 2016-B, the US$379.7m marketplace transaction is backed by refinanced student loans and incorporates a number of new features.

Provisionally rated by DBRS and Moody's, the ABS comprises US$101.38m AAA/Aaa rated class A1 notes, US$122.7m AAA/Aaa class A2As, US$131.46m AAA/Aaa class A2Bs and US$24.12m A (high)/A2 class Bs. The deal differs from other SoFi securitisations as this has a sequential pay structure, whereby no principal will be allocated to the subordinate class B notes until the senior class As are paid in full.

Furthermore, this is the first SoFi securitisation with front-pay and back-pay triple-A notes, whereby the class A2B notes will not receive any principal until the class A2A notes are paid in full. Due to a longer duration, the class A2B notes are exposed to more credit risk than the other triple-A notes in the transaction.

Additionally, the borrowers underlying SoFi 2016-B have higher incomes and monthly free cashflow than previous SoFi transactions. With weighted average borrower income of US$166,764 and weighted average borrower monthly free cashflow after expenses of US$7,062, SoFi 2016-B borrowers earn US$6,680 more than SoFi 2016-A borrowers and have US$420 more monthly free cashflow.

Also of note is that the weighted average income and average cashflow figures for SoFi 2016-B are higher than any of its previous four securitisations. Indeed, the average of US$7,062 is significantly higher than the US$5,969 weighted average cashflow in SoFi 2015-B. SoFi claims that likelihood of borrower default is best determined by monthly cashflow as opposed to traditional credit scoring methods.

DBRS notes that the lender has originated approximately US$5.9bn in refinancing loans to approximately 73,000 borrowers. Of these, only 55 have ever been 60 or more days delinquent and from inception SoFi has charged off only US$1.8m.

RB

Structured Finance

CDO trading abuses alleged

Megan Messina, a Bank of America md and co-head of structured credit products, has filed a discrimination lawsuit against the bank that includes allegations surrounding its supposed role in misleading CLO trading partners and clients. In particular, the lawsuit highlights the alleged role that Messina's colleague and co-head of global structured credit products David Trepanier played in the supposed abuse of practices within the bank.

According to the lawsuit, Messina implemented transaction guidelines in 2013 while she was head of Bank of America's primary CLO business. The guidelines were subsequently vetted both internally and externally, with the intention of assisting employees and colleagues on the correct protocol procedures.

However, the lawsuit claims that Trepanier - as head of the CLO secondary business for the bank at the time - did not replicate or form similar guidelines for his own part of the department. When the pair later became co-heads of Bank of America's CLO business, Messina's suggestion to Trepanier to produce guidelines for the secondary business was allegedly met with the following response: "Without guidelines, there are no boundaries, which is how we like it."

Attempts by Messina to address the issue with the bank's internal lawyer, David Downey, were supposedly met with an angry response from Trepanier. Messina says that the fall-out led to her no longer being consulted on the issue and, consequently, the continuation of Trepanier's "unlawful trading activities and practices".

The lawsuit goes on to cite specific examples of Trepanier's alleged unlawful trading practices, which are said to have occurred as recently as March this year. The documents describe how Messina agreed to be an intermediary and assist Citi in purchasing triple-A CLO paper on the secondary market, which would result in Bank of America obtaining a fee for its involvement in the deal.

While keeping the clients anonymous, Messina sourced bonds through GoldenTree Asset Management and subsequently priced them for trade. However, Trepanier supposedly stated that he would front-run the bonds by purchasing them and retaining them on Bank of America's books, at the expense of Citi. Objections by Messina are said to have been met with rejection.

Further allegations made argue that Trepanier undertook supposedly illegal practices after agreeing to lead an auction of Trups CDOs by Hildene. The lawsuit claims that Trepanier's hire - as a trading desk head - presented a conflict of interest in itself. This was supposedly reflected in the selective nature as to whom he disclosed details of the auctioned portfolio to, in violation of US SEC requirements to show all market participants at the same time.

The result was two serious complaints from BlackRock and Anchorage Capital Partners. The lawsuit claims that this damaged the "huge client relationship" with the former. In addition, Anchorage allegedly asserted that it was deceived and misinformed by Trepanier, "who knowingly provided them with false data, causing them to improve their bid against themselves and in having to needlessly pay more."

Other allegations include Trepanier marking up the bank's CLO secondary book for years, while using means to evade liability. In particular, the lawsuit claims that he tells subordinate traders to book trades, so that he can "plausibly deny and claim ignorance".

The case has been filed in the US District Court for the Southern District of New York, with the plaintiff represented by Sack & Sack. Messina is reportedly still an employee at the bank.

JA

Structured Finance

Risk retention class debuts

Colony Starwood Homes is in the market with its first single-family rental securitisation - the US$535.9m Colony Starwood Homes 2016-1 - following the merger of Colony American Homes and Starwood Waypoint Residential Trust in January. The transaction is also notable for including a risk retention class, representing a subordinate 5% horizontal strip designed to comply with risk retention rules.

Provisionally rated by KBRA, Moody's and Morningstar Credit Ratings, the deal comprises US$266.32m AAA/Aaa/AAA class A notes, US$58.75m AA+/Aa2/AA class Bs, US$47m A/A2/A class Cs, US$43.08m BBB+/Baa2/BBB+ class Ds, US$70.5m BBB-/NR/BBB class Es and US$23.5m BB+/NR/BBB- class Fs. The US$26.8m unrated principal-only class G notes represent the risk retention class that will be retained by the sponsor.

CSH 2016-1 is collateralised by a single floating-rate loan secured by first priority mortgages on 3,566 income-producing homes. The loan requires interest-only payments and has a two-year term with three 12-month extension options.

The cumulative BPO on the underlying properties is approximately US$783.29m. Moody's notes that it determined an initial value of US$606.89m for the portfolio after considering the sponsor's acquisition cost adjusted for 50% of Moody's estimate of home price appreciation since acquisition, plus 50% of the rehabilitation cost, and 85% of the most recent BPO. Colony Starwood Homes has spent around US$88.3m, or an average US$24,749 per home, in renovation costs since acquiring the properties collateralising the loan.

The agency assumes that a certain percentage of the properties will be sold out of the transaction at full market value before a borrower default, netting proceeds equal to the allocated loan amounts plus a pre-determined premium. To account for this negative selection and geographic concentration in certain markets, in the disposition of the properties remaining in the pool after a default, Moody's applied a home price depreciation factor to the properties' values ranging from 30% to 50% of the Moody's value at a triple-A level, depending on the MSA.

The properties are located in 27 MSAs in eight states. As a percentage of BPO, they are concentrated across Florida (28.92%), Georgia (15.65%), Texas (12.92%), California (10.85%) and Colorado (10.46%). The top five market concentrations are Atlanta (15.25%), Miami (9.72%), Dallas (8.91%), Tampa (8.63%) and Las Vegas (7.73%).

Lead managers on the transaction are JPMorgan, Bank of America Merrill Lynch and Citi.

CS

Structured Finance

SCI Start the Week - 16 May

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

Pipeline
While ABS additions to the pipeline were steady last week, they were joined by a greater variety of deals than had been the case in the week prior. Additions consisted of eight ABS, two ILS, four RMBS, six CMBS and a CLO.

The ABS were: C$400m BMW Canada Auto Trust 2016-1; US$1bn Drive Auto Receivables Trust 2016-B; £340m Greene King Finance; US$783m Hyundai Auto Lease Securitization Trust 2016-B; US$340m LEAF Receivables Funding 11; Nissan Auto Lease Trust 2016-A; Orbita Funding 2016-1; and US$551m SMB Private Education Loan Trust 2016-A.

US$100m First Coast Re Series 2016-1 and US$190m Queen Street Re XII accounted for the ILS. The RMBS were US$255m Colony American Finance 2016-1, £3.7bn Duncan Funding 2016-1, National RMBS Trust Series 2016-1 and £240.5m Oncilla Mortgage Funding 2016-1.

The CMBS consisted of: US$259.7m ACM 2016-1; US$755.7m CGCMT 2016-C1; CSAIL 2016-C6; US$750.6m GSMS 2016-GS2; US$133m LMRK Issuer Co Series 2016-1; and C$400m REAL-T Series 2016-1. The CLO was €360m Aurium CLO II.

Pricings
A large number of ABS deals priced last week. As well as 12 ABS, there was also an ILS, three RMBS, two CMBS and two CLO prints.

The ABS were: €964m A-BEST 14; US$1.3bn Capital One Multi-asset Execution Trust 2016-1; US$625m Capital One Multi-asset Execution Trust 2016-2; US$1.5bn Chase Issuance Trust 2016-A1; US$176m DRB Prime Student Loan Trust 2016-B; US$1bn Evergreen Credit Card Trust 2016-1; US$300m Exeter Automobile Receivables Trust 2016-2; US$191.8m GLS Auto Receivables Trust 2016-1; US$1.07bn GM Financial Automobile Leasing Trust 2016-2; €153m Master Credit Cards Pass Compartment France Series 2016-1; €600m SC Germany Auto 2016-1; and CNY950m Shenrong 2016-1 Retail Auto Mortgage Loan Assets Backed Securities Trust.

US$150m Residential Reinsurance Series 2016-1 was the ILS while €1.6bn BVA RMBS 16, US$255m Colony American Finance 2016-1 and US$200m Station Place Securitization Trust 2016-3 were the RMBS. The CMBS were €230m Taurus 2016-2 DEU and US$703m WFCMT 2016-C34. The CLOs were US$473m ALM XIX and US$405m Midocean Credit CLO V.

Markets
"The [US] ABS market continued to see very strong demand this week," say JPMorgan analysts. The two Capital One credit card ABS deals were strongly upsized. The analysts add: "The ABS pipeline remains full as more sponsors take advantage of improved pricing and demand. We expect the supply/demand balance will remain favourable in both the primary and secondary markets."

The key risk for US agency RMBS continues to be a selloff in risk assets and a corresponding rally in rates, say Wells Fargo analysts. However, FN 3.5s outperformed Treasuries by a tick in the week to Wednesday. "Up in coupon largely outperformed as well, which points toward minimal concerns around the prepayment risk. The hedge-adjusted carry on FN 3.5s is 1 tick; and while it is nothing to harp about, it is still quite respectable. The curve hedged carry is a healthy 3 ticks," they note.

In Europe, Bank of America Merrill Lynch analysts note that high primary and secondary supply across ABS, RMBS, CMBS and CLOs probably represents "a storm before the calm" as a referendum and election approach. BWICs presented a wide array of bonds and most appear to have traded. "The primary market was also diverse with dominant auto loan ABS supply stream, supplemented with European CMBS and CLOs, rare credit card ABS, etc. Strangely, given the strong demand, deals which could have been placed with investors were fully or partially retained," the analysts note.

Editor's picks
Firm foundations: The £6.2bn Towd Point Mortgage Funding 2016-Granite1 RMBS that priced last month is the largest new issue in its sector since before the financial crisis. However, its effect on the market could be revolutionary for a different reason - the introduction in Europe of a weighted average coupon (WAC) cap (SCI 28 April)...
IFRS 9 calculation warning: A recent study undertaken by Kamakura Corporation underlines the risks of using credit spreads to assess obligor creditworthiness in light of the upcoming IFRS 9 implementation and the FASB's current expected credit loss model. The findings of the study, entitled 'Fair Value and Expected Credit Loss Estimation', highlight that the common usage of credit spreads - which are derived from observable bond prices but contain false assumptions - contributes large errors to valuation and credit assessment in the obligor creditworthiness analytical process...
Value to be had in card ABS: The first euro-denominated credit card ABS of the year priced this week, helping to chip away at the dearth of primary supply. European credit card ABS distributed issuance is just €550m year-to-date, the second-lowest tally since 2011, so investors are increasingly focusing on secondary market opportunities...
US CLOs pause: The US CLO secondary market looks to be taking time to reflect this week. "It seems like the rally has taken a bit of a pause this week," says one trader. "People are looking at where things stand in respect to credit and deciding on what the path forward might be..."

Deal news
• April remittance reports showed muted activity for US CMBS 2.0 loans secured by properties located in oil boom regions compared to prior months, with only three such loans transferring to special servicing, according to Morgan Stanley CMBS strategists. The largest loan with exposure to oil boom regions to transfer to special servicing was the US$11.6m TownePlace Suites Odessa, securitised in COMM 2012-CR4.
• A second judgment in less than a month has gone against CMBS class X noteholders. Last month, a judge ruled against the class X noteholders in Windermere VII, dismissing the plaintiffs' arguments (SCI 11 April), while the latest case concerned four transactions in the Titan series, including Titan Europe 2006-1.
• United Guaranty Corporation (UGC) has obtained US$298.6m in reinsurance coverage for its legacy portfolio book in its latest ILS deal, Bellemeade Re II. The transaction is believed to be the first in the asset class to include a pre-2009 portfolio of mortgage insurance policies.
• The trustee for the Strawinsky I CLO has received notice from a class B noteholder disapproving the appointment of Dynamic Credit Partners Europe as successor investment manager (SCI 22 April). Pursuant to clause 10.5 of the master investment manager terms, the appointment of a replacement manager is subject to a simple majority of the controlling class (currently the class B noteholders) acting by ordinary resolution not disapproving the move within 21 days of notice of such a proposal.

Regulatory update
• The Bank of China (BOC) has announced that it is proactively preparing for the pilot implementation of its NPL securitisation scheme. At the same time, Fitch has commented that NPL transactions in China will provide a challenge to investors due to the unpredictability of their cashflows and an uncertain judicial process.
• The US Treasury has released a white paper on marketplace lending, which continues the work initiated by last year's request for information (RFI). It reviews over 100 responses from a range of key industry figures and makes recommendations for the continued safe growth of the industry.
• SFIG's draft proposal to standardise the framework for reviewing and grading loans for TILA-RESPA Integrated Disclosure (TRID) rule compliance is generally adequate to identify compliance risks that are likely to cause RMBS losses, says Moody's. However, the rating agency does disagree with one grading provision.
• ESMA has published the results of its first EU-wide stress test exercise regarding central counterparties (CCPs). The exercise aims to assess the resilience and safety of the European CCP sector, as well as to identify possible vulnerabilities. The results show that the system of EU CCPs can overall be assessed as resilient to the stress scenarios used to model extreme but plausible market developments.
• The New York Supreme Court last week received a proposed severance order and partial final judgement from BNY Mellon as trustee for 512 of the 530 RMBS trusts subject to the US$8.5bn Countrywide Settlement. A group of investors, who have been actively involved in the determination of the proper procedures for handling the payout, have filed a motion consenting to BNY Mellon's proposal.

Deals added to the SCI New Issuance database last week:
Ascentium Equipment Receivables 2016-1 Trust; Bavarian Sky Compartment German Auto Loans 4; Black Diamond CLO 2016-1; Carlyle Global Markets Strategies 2016-2; Cars Alliance Auto Loans Germany V 2016-1; CCRESG 2016-HEAT; Cedar Funding V CLO; Compartment Private VCL 2016-1; Credit Acceptance Auto Loan Trust 2016-2; Dryden 44 Euro CLO; Earnest Student Loan Program 2016-B; Elm Park CLO; FDF II ; Flagship Credit Auto Trust 2016-2; FREMF 2016-KF16; FREMF 2016-KIR1; FREMF 2016-KJ04; Golden Credit Card Trust series 2016-3; Golden Credit Card Trust series 2016-4; Highbridge 9-2016; Home Loan Invest 2016; MMAF Equipment Finance 2016-A; NextGear Floorplan Master Owner Trust Series 2016-1; NP SPE II; OnDeck Asset Securitization Trust II Series 2016-1; Palmer Square Loan Funding 2016-2; PCT 2016-PLSD; Race Point X CLO; Santander Drive Auto Receivables Trust 2016-2; Sapphire XIV Series 2016-1 Trust; Small Business Origination Loan Trust 2016-1; Sound Point CLO XI; STACR 2016-DNA2; Swiss Car ABS 2016; Taco Bell Funding series 2016-1; Toyota Auto Receivables 2016-B Owner Trust; Trinitas CLO IV

Deals added to the SCI CMBS Loan Events database last week:
BSCMS 2004-PWR3; BSCMS 2006-PW11; CGCMT 2013-GC15; COMM 2012-CR4; COMM 2012-CR7; COMM 2014-CR18; COMM 2014-LC15; COMM 2014-UBS6; CSAIL 2015-C2; ECLIP 2006-1; ECLIP 2006-2; ECLIP 2006-4; ECLIP 2007-2; EURO 28; GECMC 2005-C4; GSMS 2014-GC18; INFIN SOPR; JPMBB 2014-C21; JPMCC 2006-CB15; JPMCC 2007-LDP12; JPMCC 2012-CBX; MSC 2006-HQ8; NEMUS 2006-2; TITN 2007-2; TMAN 5; TMAN 6; TMAN 7; UBSBB 2013-C5; WFRBS 2014-C19; WINDM VII; WINDM X

CLOs

Collateral concerns cause downgrades

The ratings on the class E notes of Mountain Hawk I CLO and on the class D and E notes of Mountain Hawk II CLO have been downgraded by S&P. Mountain Hawk I has been affected by a decline in supporting collateral and increase in triple-C rated or defaulted assets, while Mountain Hawk II has also suffered significant par loss.

The Mountain Hawk I class E notes were downgraded from double-B to double-B minus. Ratings were affirmed on the A1, AX, B1, B2, C and D notes.

S&P notes that Mountain Hawk I is still in its reinvestment phase, which is scheduled to end in January 2017. Defaults increased by US$23.3m from the transaction's effective date in May 2013 to the trustee report last month. During the same time the amount of triple-C rated assets increased from US$14.1m to US$25.5m.

The increase in defaults has affected the amount of collateral supporting the notes, which has decreased by US$13.8m. The transaction also has 5.28% in exposure to the distressed oil and gas sector.

Par loss for Mountain Hawk II is US$19.35m. The class D notes were downgraded from triple-B to triple-B minus and the class E notes were downgraded from double-B to single-B. Ratings were affirmed on the class A1, B and C notes.

The rating agency notes that all rated Mountain Hawk II notes remain current on their interest payments, but that if the class E OC ratio falls below 102.2% on the July payment date, the transaction will begin to de-lever by paying down the principal balance on the senior A1 notes. Weighted average spread has dropped since the transaction's effective date, decreasing its ability to cover OC shortfalls on junior notes.

S&P says much of the transaction's par loss has occurred because of the distressed energy sector, with 71.59% of the total US$23.26m in reported defaulted collateral belonging to either the oil and gas or non-ferrous metals/minerals sectors. Performing energy exposure in these categories still remains relatively high at 6.55% of the aggregate principal balance.

Mountain Hawk I and II have minimum OC cushions of 146bp and 33bp respectively. Wells Fargo CLO analysts note that these levels are far below the deals' respective issuance cohorts - 1Q13 and 3Q13 - which have medians of 401bp and 394bp respectively.

"The two deals have exposure to defaulted assets above 4.5%, while the issuance cohorts have median exposure of 0.8%-0.9%. The two deals also have higher-than-average commodities exposure (9.1%-11%), while the cohort medians range from 5.4% to 5.6%," the Wells Fargo analysts add.

Mountain Hawk I has 5.6% exposure to loans rated Caa1/triple-C plus or lower, while Mountain Hawk II has Caa bucket exposure of 5.6% and triple-C bucket exposure of 3.1%. Both deals have Caa/triple-C asset exposure above their cohort median.

WARF levels for both deals are above 3,000, while their issuance cohorts are in the 2,880 range. The difference is 139bp for Mountain Hawk I and 151bp for Mountain Hawk II.

"The Mountain Hawk deals are not the only ones to suffer par loss in recent months; we see six post-crisis deals (one is Mountain Hawk I) that have less than 50bp cushion on their minimum OC tests. Three of these deals have recently been downgraded," say the analysts.

They add: "In addition, there are 91 post-crisis deals reporting more than 7.5% exposure to Caa bucket assets, per Intex; all but three of these deals are over their Caa bucket test limit, meaning they are likely haircutting some low-rated assets. Twenty-seven of these deals have more than 10% Caa bucket exposure."

Most post-crisis deals with low minimum OC cushions, high Caa buckets or high percent of defaulted assets were issued in 2013 and 2014. Deals issued in 2015 have yet to see significant collateral deterioration.

JL

RMBS

Upgrades boost Spanish RMBS

The Spanish RMBS sector continues its recovery, with Moody's last week upgrading 200 classes of Spanish RMBS across 91 deals. JPMorgan European securitisation analysts expect this to provide positive technical support for secondary market pricing, although capital requirement benefits will be mixed.

As well as the 200 upgrades, a further 108 classes were affirmed and only five were put on downgrade watch. The JPMorgan analysts calculate that around 60% of the outstanding Spanish RMBS transactions that Moody's rates were affected.

The rating agency says the upgrades were prompted by increases in available credit enhancement and positive revisions to key collateral assumptions, including expected loss, for certain deals. Moody's has previously taken several rating actions on the asset class, accounting for more than three-quarters of all rating agency upgrades in the sector since the start of 2009.

Moody's previously upgraded several Spanish RMBS in 2H14 and then again in 1Q15 (SCI 26 January 2015) and 3Q15 (SCI 14 July 2015). The analysts note: "These earlier, large scale ratings upgrades in the sector were driven by a variety of factors, including the inclusion of counterparty risk assessments in the ratings methodology and upgrades to the Spanish sovereign rating and local-currency country risk ceiling (currently Baa2 and Aa2 respectively). Since the beginning of 2014, we calculate that Moody's has taken more than 1,200 positive rating actions on Spanish RMBS."

Last week's upgrades represent a cumulative current balance of €28.1bn, including €17.2bn of distributed bonds, which represents 38% of distributed Spanish RMBS outstanding. Around three-quarters of upgrades by balance were for note classes issued between 2001 and 2008, while the rest were issued in 2006 and 2007.

Upgrades were also concentrated among non-senior bonds, which accounted for 140 of the 200 upgraded bonds but only 13% of the outstanding balance. Among non-retained bonds, by originator, Bancaja accounts for the largest balance of upgraded bonds at €3.5bn across 27 bonds in the BCJAF and BCJAM shelves, followed by the former Caja de Ahorros del Mediterráneo at €2.9bn under the TDAC shelf, and Caja Madrid at €2.5bn under the CAJAM shelf.

Upgrades for 96 of the 200 bonds were by one notch, while 72 were by two notches and 20 were by three notches. Another 12 bonds were upgraded by four notches.

Bonds previously rated Baa3 or just below investment grade (Ba1-Ba3) benefitted from a comparatively higher proportion of more significant upgrades, as 29 bonds moved from below-investment grade into investment grade territory. The extent of upgrades on higher rated bonds was constrained by Spain's local currency risk ceiling, which caps Spanish RMBS at Aa2. There were 34 bonds upgraded to that Aa2 ceiling.

The analysts expect bonds that were upgraded to investment grade levels or were already investment grade but received a considerable ratings uplift will particularly benefit from positive technical support for secondary market pricing. They add: "For bank investors who utilise the ERBA, ratings upgrades may help improve capital requirements for holding certain senior Spanish RMBS positions. However, higher ratings on investment grade-rated senior bonds will not benefit insurance company investors under Solvency II (Type 1 assets), given the ratings cap at Aa2."

The analysts continue: "While the spread risk on Type 2 assets (subordinate positions) meaningfully declines as ratings move from below investment grade to investment grade, capital requirements remain too onerous to justify involvement in the space. We remain overweight Spanish RMBS seniors and prefer Spanish risk to other peripheral jurisdictions, but note that modest headline risk - namely around the upcoming elections in late June - could lead to volatility over the near term."

JL

Structured Finance

Hedge fund taps credit head

Muddy Waters Capital has brought in Terrence Ing as head of credit. In this role, he will seek opportunities in the corporate credit market, including investment grade credits that could re-rate to high yield.

Ing will also assist the firm with his expertise in derivatives and various securities across the capital structure. Prior to joining, he served as a portfolio manager and senior analyst for PIMCO's Global Credit Opportunity hedge fund, where he focused on cross-sector credit relative value and long/short opportunities.

Structured Finance

CLO pro moves on

Nathan Abegg has joined KPMG as partner in its securitisation practice. He arrives from Deloitte & Touche, where he specialised in CLOs as a director for the firm. Abegg will be based in New York in his new role.   

Structured Finance

Securitisation teams to merge

Schroders is set to take on Brookfield Investment Management's securitised products investment management team. The Brookfield team will combine with Schroders' existing ABS group in New York, which will oversee more than US$8bn in combined assets under management.

The Brookfield team is led by md Michelle Russell-Dowe and will have access to Schroders' asset management platform, economists, research and risk management capabilities. In addition, Schroders will take on an Irish qualifying investor alternative investment fund from Brookfield as part of the agreement.

Schroders' North American ceo and co-head of fixed income, Karl Dasher, says that the acquisition is part of the process of strengthening the firm's US and non-US investor base. Financial terms of the transaction were not disclosed, but it is expected to complete in 3Q16.

Structured Finance

Fund targets new structured opportunities

Semper Capital Management is prepping a new alternative asset strategy to seize new opportunities in structured credit resulting from a combination of post-crisis regulatory changes and disruptive technology. The firm has begun making investments in target assets and will officially launch the fund on 1 June.

"New, previously impossible products are being created as a result of big data and new connectivity, while recent regulatory changes limit the ability of traditional funding sources to compete for assets," says Zach Cooper, deputy cio at Semper. "We are excited to leverage established relationships and Semper's deep knowledge of the mortgage credit industry to navigate this new landscape."

As an example, the firm believes that sophisticated data interconnectivity combined with rapidly developed software allows property managers to acquire and maintain many more single-family rental properties than was ever previously possible. Economies of scale are therefore much easier to reach.

Semper's portfolio management team averages over 27 years of experience in mortgage credit and fixed income. It is not targeting a specific fund size but is currently evaluating opportunities to invest US$500m or more in the new strategy.

Structured Finance

SFIG adds advocacy leader

SFIG has named Thomas McCrocklin as director of advocacy. He will report directly to executive director Richard Johns and will lead the group's interactions with regulators and legislators.

McCrocklin was most recently vp and head of federal affairs at Zurich North America. He has also served as senior counsel on the US House of Representatives Committee on Financial Services and was director of federal affairs at the Independent Insurance Agents of America.

Structured Finance

BNP cut-back planned

BNP Paribas is set to cut half of its 35-person London securitisation team under plans to implement broader cut-backs to its investment banking operations. The cuts will reportedly see 233 investment bank jobs in total given the axe. However, a number of the roles in the securitisation department are expected to be redeployed into other areas of the bank.

CDO

CRE CDO manager replaced

The holders of a majority of the outstanding principal amount of the controlling class of Gramercy Real Estate CDO 2007-1 have directed the issuer to appoint Dock Street Capital Management as successor collateral manager, replacing CWCapital Investments. The issuer intends to appoint Dock Street as successor manager, unless a majority by aggregate outstanding amount of each class of notes objects by notice to the trustee within 30 days. Accordingly, any objecting noteholders are requested to notify the trustee in writing by 17 June.

Pursuant to Section 12(e) of the transaction's collateral management agreement, so long as the class A1 and/or the A2 notes are the controlling class, they have the right to instruct the issuer to appoint an institution as replacement manager upon the resignation of the collateral manager.

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

CDO

Faxtor CDOs transferred

Dock Street Capital Management has replaced IMC Asset Management as collateral manager for a pair of ABS CDOs - Faxtor ABS 2003-1 and 2004-1. Moody's has determined that the move will not affect its ratings of the notes. The collateral manager resigned from its duties on 31 December 2015 and the issuer subsequently appointed Dock Street as successor on 15 March.

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

CLOs

CMBS, CLO data tie-up confirmed

Trepp has purchased CLO data and cashflow analytics firm Codean. The UK-based firm has a US and European CLO deal library, which will be combined with Trepp's CMBS database to enable investors to perform deep analysis across two complementary asset classes.

Codean's CLO analytics platform will become part of the Trepp solution suite. It is able to evaluate each tranche, deal or loan and enables analysis of individual deals or whole CLO portfolios, including cashflow projections, flexible waterfall modelling, price/yield discount margin calculations and optimal call date determinations.

CLOs

Dynamic appointment approved

The controlling class of Strawinsky I CLO, acting by ordinary resolution, has not disapproved the appointment of Dynamic Credit Partners Europe as successor investment manager. Dynamic will therefore, subject to the other conditions of the master investment manager terms, be appointed as successor investment manager for the transaction. The move follows the objection of a class B noteholder to the appointment (SCI 9 May).

RMBS

MBS trading, sales teams boosted

KeyBanc Capital Markets has expanded it fixed income sales and trading platform with the appointment of a seven-person team in New York to focus on MBS. This includes Joe Vaccaro, who joins from RBC Capital Markets to serve as md and head of mortgage trading for KeyBanc.

Vaccaro will be responsible for developing and managing the secondary trading desk, while partnering with KeyBank Real Estate Capital and KeyBank Mortgage Company. He will report to Tom Goodrick, md and head of fixed income trading.

In addition, Steve Palmer joins the fixed income trading team as a senior MBS trader, responsible for RMBS agency trading. Jiwon Park also joins as a trader and analyst, and will focus on all MBS credit products. The new trading team will work alongside existing MBS desk members Bill Chambers and Raymond Lafontant.

Another addition includes Michael Corsi as md and co-head of MBS sales with Keith Newman, rates sales manager. Chris Heaney, Chris Flaten and Chris Morello also join the bank's fixed income sales team, reporting to Corsi and Newman.

"When KeyCorp's acquisition of First Niagara closes later this year, our group will increase the size of its RMBS business, so adding a team of talented individuals with experience across all MBS trading becomes essential," says Brian Brennan, md and group head of fixed income.

RMBS

Countrywide partial judgement approved

The severance order and partial final judgement for 512 of the 530 trusts subject to the US$8.5bn Countrywide RMBS settlement has been approved (SCI 12 May). The severance order provides for the pay-out for the 512 initial release trusts to be resolved, while proceedings on the 18 remaining trusts continue, according to Wells Fargo RMBS analysts. The partial final judgement dictates the timing and the manner by which the trustee BNY Mellon should distribute the settlement proceeds.

The settlement documents specify that if the judgment is entered prior to the 20th calendar day of the month, then that month becomes the 'transfer month' and the trustee must then deposit the settlement proceeds into the payment account of each initial release trust by the first day of the following month (the 'target transfer date'). Consequently, the pay-out is expected to occur in June.

The Wells Fargo analysts note that the judgment also solves the issue of overcollateralisation (OC) leakage. For the purposes of determining the principal distribution for the initial release trusts, the trustee shall calculate the OC amount to account for the pay-down of the certificate balance and the write-up of the certificate balance in an amount equal to the trust's allocable share, plus any ordinary subsequent recoveries.

ABS

PREPA deadline passes

PREPA last week announced that it is continuing 'productive discussions' with its creditors after the Thursday deadline passed without a renewal of terms regarding its bond purchase agreement. The news follows an offer that was set out by the PREPA Bondholder Group to pre-fund the purchase price of the 2016 bonds from the utility (SCI 11 May).

After the deadline passed, PREPA said it was continuing to work out a potential closing of a US$111m bond purchase under the restructuring support agreement put in place. The issue for creditors reportedly surrounds the Puerto Rican government's Moratorium Act, which allows the commonwealth to skip principal and interest payments on its debts. This includes those on PREPA, which has prompted creditors to ask for an exemption with the utility.

Meanwhile, Syncora provided an update after it continues to be a holdout bondholder in the process. The Bermuda-based firm says it is continuing to engage in discussions with PREPA, but no agreement has emerged from talks and there is no guarantee that a settlement will be reached in the final outcome.

ABS

Tobacco ratings withdrawn

Fitch says that it is withdrawing any outstanding ratings on US tobacco ABS. The agency notes that its confidence in the current ratings have eroded as a result of a number of individual, customised modifications to calculations that were originally made in the Master Settlement Agreement (MSA).

Fitch explains that it can no longer guarantee that its ratings are maintained for the tobacco deals as insufficient information exists to predict the likelihood and effect of future modifications. There is also a lack of information to support new, material variables included in the modifications.

Historically, the method for calculating the amount of the annual and strategic contribution fund payments by participating tobacco manufacturers (PTM) was solely prescribed by the terms of the MSA. There was often a single, consistent application of any calculation adjustments that affected all participating jurisdictions in the same way.

However, more recent settlement agreements related to disputed payments connected to the non-participating manufacturer (NPM) adjustment has furthered Fitch's uncertainty. Two material settlements in the past few years - one between New York State and the PTMs, and the other among California, 23 other states and the PTMs - modified the calculation of the NPM adjustment outside of original MSA calculations.

The New York settlement also introduces a new variable - a calculation related to tribal sales. This is based on estimates initially, with Fitch explaining that its past and future volatility is unknown.

The agency acknowledges that the settlement agreements have positive features, most notably the release of previously escrowed funds held in the disputed payment account and more clarity regarding disputed payment calculations going forward. However, it says that this does not move aside the long-term implications from the changes made to the NPM adjustment calculation.

The withdrawal of the ratings is expected to be made within 30 days.

Structured Finance

Class-action proposal scrutinised

The Consumer Financial Protection Bureau has released a proposal to end the use of clauses in US financial-product contracts that prevent consumers from taking part in class-action lawsuits. Moody's suggests that the rule would create new risks for financial services companies and US ABS tied to consumer loans.

"The fact that the proposed rule would not affect contracts outstanding before it is finalised would lessen its effects initially, as well as over the longer term for contracts on products that typically have long lives, such as credit cards," the agency observes. "Nevertheless, if adopted, the rule would expand legal risks for banks and other financial companies, and could adversely affect some securitisations. Some of the negative effects, however, would be offset if the rule leads to improved borrower credit quality by ending practices that weaken consumers' finances."

The CFPB is accepting comments on the proposed rule for 90 days after its publication in the Federal Register. Under the proposal, the regulation would cover only contracts entered into beginning 211 days after the publication of a final rule.

The CFPB's proposal states explicitly that amendments or modifications to pre-existing contracts would not require the provider to insert language into the agreements allowing consumers to pursue class-action lawsuits. However, the agency is seeking comment on whether that approach is too narrow.

Over time, the rule is expected to expose banks and finance companies to increasing risk of litigation and settlements with customers, as well as potential reputational damage. The impact would depend on the size and success rate of class-action lawsuits.

In turn, if companies negatively affected by lawsuits play key roles in securitisations, a weakening of their financial position could also weaken the credit quality of the transactions in certain cases. Lawsuits could also have other negative credit effects on securitisations, such as: if legal and/or regulatory settlements require that loan servicers alter their collection practices; if representations and warranties by securitisation sponsors fail to cover challenged payment terms or practices; or if sponsors are unable to honour obligations to repurchase impaired loans.

However, providing consumers with greater legal recourse would carry some offsetting positive effects on the credit quality of securitisations to the degree that it strengthens borrowers' finances, according to Moody's. "Settlements or court rulings that require consumer-friendly adjustments to lender or servicer practices can be more important in this regard than the often small monetary awards that individual consumers win through class-action litigation," it notes.

Structured Finance

SFR expenses weighed

Actual net cashflow in single-family rental securitisations has been in line with expectations at new issuance. However, Morningstar Credit Ratings reports that the expense components have been hurt by higher-than-expected actual capital expenditures and helped by lower-than-expected vacancy.

In a recent study of 17 single-borrower SFR transactions, the agency highlights that gross potential rent and other income make up revenue. Real estate taxes, property management fees, home-owners association fees and insurance are considered as non-controllable expenses. Repairs and maintenance and leasing and marketing/turnover expenses are controllable expenses.

The Morningstar analysis shows that non-controllable expenses are nearly even with those underwritten by the issuers. "The range of each expense component is generally tighter across non-controllable expenses, except for real estate taxes, which highly depend on the properties' locations, so taxes can vary across transactions. Otherwise, the controllable expenses are generally in a wider range than the non-controllable expenses. Actual repairs and maintenance costs have been lower than expected, decreasing controllable expenses," the agency observes.

Although actual and issuer-underwritten net cashflow are close, Morningstar suggests that understanding the relationship between each expense component that leads to net cashflow is important. For example, vacancy has been lower than originally underwritten - which while good for net cashflow, if it were to increase even to issuer-underwritten levels, repairs and maintenance and leasing/turnover costs would likely increase. With transactions already experiencing higher-than-underwritten actual capital expenditures, managing vacancies will be even more important to maintain net cashflow.

Higher capital expenditures also require some context, according to the agency. While in the short term this expense hurts net cashflow, depending on the nature of the improvements, capital expenditures should stabilise over time and the long-term benefits to the transactions may flow through because of higher gross potential rents.

CDO

Taberna CDO served

The trustee for Taberna Europe CDO II has served the issuer with a notice of default, stating that it is in breach of clauses 22 of the collateral management agreement and clause 11.13 of the trust deed. These breaches are required to be remedied within 45 days, failing which an EOD will arise.

The notice of default was served following a judgment dated 8 April and order made on 13 May by Justice Newey. The issuer and collateral manager (Taberna European Capital Management) have 21 days to file an appellant's notice seeking permission to appeal with the Court Of Appeal.

The notice relates to a claim brought in the English Commercial Court by Citicorp Trustee Company regarding disputed swaps (SCI 26 February). If an EOD occurs, the class A1 noteholder (Barclays Bank) has undertaken to provide 14 days' notice before directing that the notes are immediately due and repayable.

CLOs

Middle-market warehouses analysed

Investment in middle-market CLO warehouses is on the rise, according to DBRS. These facilities share similarities with typical bank loan and middle-market CLOs, but have key structural elements that differ in order to match the characteristics and typical lifecycle of lending to middle-market borrowers.

Warehouse securitisation facilities have historically been funded by banks, clubs of investors or ABCP conduits without the benefit of a rating. However, changes in investor appetite for middle-market corporate risk and regulatory capital rules have over the last year substantially increased the number of rated warehouse securitisations globally, particularly for US and European middle-market CLOs.

The increase in investor interest in senior secured loans to middle-market borrowers is driven by the yield pick-up relative to syndicated bank loans, stronger covenant packages and regulatory support for non-bank direct lending. In particular, US insurance companies are investing in the middle-market space through direct lending, separate managed accounts and participation in middle-market CLO warehouses. DBRS suggests that by investing in this manner, they are better able to match their liabilities and at a better yield than in traditional capital market instruments.

Credit funds, banks and European insurers are also showing interest in direct lending. Additionally, other non-bank alternative lenders have emerged in Europe and continue to grow in the US, supplying further middle-market loans to borrowers in the US$15m-US$50m EBITDA range.

Middle-market CLO warehouses are structured with more flexibility than typical CLOs. "These facilities resemble permanent warehouses and can provide leverage to portfolios of middle market loans originated by a non-bank lender. Such lender acts as a CLO manager and originates each of the middle-market loans via direct lending or as a member of a club lending syndicate," DBRS explains.

The agency continues: "The facility investor or an affiliate typically retains some, if not all, of the equity. Middle-market CLO warehouses can either be true warehouses in anticipation of a CLO take-out or can be permanent capital facilities themselves."

The portfolio is typically originated over a longer ramp-up period than typical CLOs, some as long as 18 months. Fully ramped portfolios typically contain only 30 to 40 loans, meaning that portfolios are more concentrated, reflecting the industry and origination expertise of the lender.

The underlying middle-market borrowers are typically unrated and, as a result, warrant individual analysis to estimate their credit quality. This typically takes the form of a corporate credit estimate. DBRS notes that a typical middle-market borrower is commensurate with single-B to single-B (low) credit quality, with the occasional borrower at the triple-C (high) level.

Portfolios typically comprise senior secured loans though unitranche loans, first-out senior secured loans, second-out senior secured loans and second-lien loans.

Middle-market CLO warehouse leverage is lower than for typical CLOs at around one-to-two turns. The capital structure often includes liabilities structured as loans to facilitate funding draw-downs as new middle-market loans are originated during the ramp-up period. Liability structures are simpler than in typical CLOs, with generally only one or two rated tranches providing leverage to unrated equity commitments.

During ramp-up, equity typically funds first and the rated debt remains undrawn. Once a minimum portfolio of loans has been accumulated, rated debt is drawn.

Because of the club nature of investors, middle-market CLO warehouses can experience more frequent substantive amendments than typical CLOs, including upsizes and extensions to the reinvestment period.

CMBS

Delinquencies inch up

US CMBS delinquencies last month rose to 2.92% from 2.90% a month earlier, according to Fitch, marking the first increase in its index for the sector since June 2015. The dollar balance of late-pays increased by US$118m to US$11.05bn from US$10.93bn in March, while new delinquencies of US$494m exceeded resolutions of US$353m. Fitch-rated new issuance volume of US$6.8bn in March (from seven transactions) exceeded the portfolio run-off of US$5.8bn, causing an increase in the index denominator.

Fitch expects the CMBS delinquency rate to fluctuate during the year, but remain below 3% by year-end, as recent larger balance loan transfers to special servicing may become delinquent. The agency says it has recently observed larger balance loans transfer to special servicing with increasing frequency.

In fact, nine loans (worth US$1.98bn) with loan balances greater than US$100m have transferred to special servicing since the beginning of the year for either imminent maturity default, imminent monetary default or maturity default. An additional six loans (US$446m) with loan balances between US$50m and US$100m were also transferred to special servicing.

The largest new delinquency last month - which caused an 8bp increase in office delinquencies - was the US$259m Fair Lakes Office Park loan (US$116.55m was securitised in GSMS 2006-GG8 and US$142.45m in CD 2006-CD3). The borrower has agreed to proceed with a deed-in-lieu of foreclosure after its loan modification proposal was denied. The loan was slated to mature in August.

Resolution activity last month was mainly from smaller loans with an average balance of US$7m. The largest four resolutions (three of which were retail properties) were between US$26m and US$28m, while the remainder were all less than US$16m.

The largest resolution - the US$27.4m Hickory Point Mall (BSCMC 2006-PWR11) loan - was modified in April, whereby the loan payments are interest-only until the extended maturity date of 1 December 2018 (see SCI's CMBS loan events database). Meanwhile, the US$27.4m REO Black Canyon & Red Mountain Office Buildings (CSFB 2005-C5) asset was disposed of at nearly a 47% loss on its original loan balance of US$40m.

Current and previous delinquency rates by property type are: 4.42% for retail (from 4.45% in March); 4.16% for office (from 4.08%); 3.59% for hotel (from 3.20%); 0.90% for multifamily (from 0.92%); 3.34% for industrial (from 3.49%); 3.25% for mixed use (from 3.25%); and 0.72% for other (from 0.78%).

Insurance-linked securities

Everglades loss risk up slightly

S&P has affirmed its double-B rating on Everglades Re II Series 2015-1. The probability of attachment and expected loss increased slightly for the risk period beginning 1 June 2016, but remains well within the permitted range.

The ILS transaction's documents allow for a variable reset so long as the expected loss ranges between 1.21% and 1.41%. The initial attachment probability and expected loss were 1.46% and 1.31% respectively, and are 1.5% and 1.33% for the upcoming risk period. As a result, the interest risk spread increased from 5.15% to 5.23%.

The initial attachment and exhaustion levels were US$6.256bn and US$7.05bn and the updated levels are US$4.270bn and US$5.03bn respectively. "The insurance percentage - that is, the portion between the attachment and exhaustion points covered by the notes - rose from 37.7834% to 39.4737%," notes the rating agency.

S&P says that the decreases in attachment and exhaustion levels are due to the depopulation programme, whereby a significant amount of the residential properties that until now were insured by Citizens Property Insurance have been renewed into take-out companies, as well as commercial-residential exposures moving over to the traditional insurance market.

Insurance-linked securities

ILS methodology RFC issued

AM Best has issued a request for comment on its draft Best's Insurance-Linked Securities and Structures Methodology (BILSM). Comments are requested no later than 16 June as the new methodology is expected to be implemented in 3Q16.

The BILSM provides an outline and summarisation of the methodology AM Best uses to rate ILS. It offers a forum for discussion with analytical staff and will also be the ongoing central repository for AM Best's Idealised Issue Default Matrix and Idealised Issuer Default Matrix. Once released for use, the default matrices in BILSM will supersede all existing versions of default matrices in currently published criteria.

Insurance-linked securities

Solvency 2 to boost ILS?

The size of the collateralised protection market is expected to increase from US$70bn to US$160bn by 2020, according to a new Clear Path Analysis report. Its latest Insurance-Linked Securities for Institutional Investors report predicts that new solvency regulation in Europe will increase insurer appetite for insurance-linked securities and collateralised reinsurance, so as to minimise credit risk charges.

Capital markets now represent close to 25% of market share for reinsurance products. And the collateralised protection market is expected to make up more than 30% of the overall catastrophe reinsurance market by 2020.

Michael Stahel, a partner at LGT ILS Partners, says that the most efficient and effective way to buy reinsurance protection within the Solvency 2 capital requirement is collateralised reinsurance. The effect of this, LGS ILS Partners predicts, will be that by 2020, "the collateralised market will make up more than 30% of the overall catastrophe reinsurance market...compared to about 18% today."

One potential implication of the Solvency II framework is an increased level of interest in diversified insurance products, such as life ILS. Javier Rivas, head of life products at Credit Suisse Insurance Linked Strategies, comments: "As a consequence of new Solvency II regulations, many insurance companies in Europe are trying to find out how to optimise their risks and capital positions - which can result in a new wave of reinsurance transactions, in which life ILS can participate."

The report also discusses the prospect of cyber risk as a new product for the industry and the impact of weather forecasting as a tool for determining the underlying value of collateralised insurance products and as a more direct evaluation of weather risk as an ILS asset class. However, Dirk Lohman, head of insurance-linked strategies at Schroders, cautions: "There is probably a high degree of potential correlation of a massive cyber event and disruption in financial markets... We don't believe that this can be clearly argued to be a non-correlating asset."

Additionally, representatives from the Met Office and the Florida Catastrophic Storm Risk Management Center discuss the impact that climate change predictions and increasingly complex weather models have on the underlying value of ILS products. With increased interest in products such as life ILS and 'risks attaching during' (RAD) contracts, weather forecasting is predicted to play a significant role in the future of the industry.

NPLs

FNMA NPLs scooped up

Goldman Sachs is the latest winning bidder in Fannie Mae's ongoing process of selling off NPLs. The latest auction, the fifth to be held by the GSE, will see 7,900 loans worth US$1.48bn sold to the bank across four pools.

The loans were marketed from 12 April, with Fannie Mae assisted by Bank of America Merrill Lynch, First Financial Network and CastleOak Securities. Goldman's successful bid for all the pools came through its subsidiary MTGLQ Investors.

The largest pool comprises 3,571 loans at nearly US$670m in value. The average loan size was US$187,433 with an average weighted delinquency of 48 months. The weighted average sale price of the combined pools was approximately in the mid-70s as a percentage of unpaid principal balance.

The transaction is expected to close on 27 June. Separate bids are still due on Fannie Mae's third community impact pool of loans, which has a 19 May deadline.

Risk Management

LCR disclosure consultation opens

The EBA has launched a consultation on its proposed guidelines for the liquidity coverage ratio (LCR) disclosure. The proposals are the latest by the regulator to set out harmonisation standards and also specify both the qualitative and quantitative disclosure requirements for institutions.

The guidelines, which are being developed under the EBA's own initiative, set out uniform tools for the liquidity disclosure framework. This includes a harmonised table for the disclosure of general information on liquidity risk managed, which has already been laid out in the Capital Requirements Regulation.

The guidelines also set out qualitative and quantitative templates and relative instructions for the disclosure of information on the LCR composition. In addition, they specify the key figures and metrics in the context of liquidity risk.

The EBA says that the application of the guidelines is not expected to take place before 30 June 2017. A public hearing on the guidelines will take place at the EBA premises on 13 June, while the consultation will run until 11 August.

Risk Management

KRIS coverage expanded

Kamakura Corporation has added coverage of 849 public firms in Bulgaria, Croatia, Hungary, Romania and Serbia to its Kamakura Risk Information Services (KRIS) platform. The default probability and bond information service now covers more than 38,000 public firms in 67 countries, over 120 sovereigns, more than 6,500 US commercial banks and almost all securitised commercial real estate loans in the US.

The firm says the geographical expansion of KRIS was driven by client requests for expanded coverage. Default probabilities, bond prices and credit spreads available via the service are updated daily.

RMBS

Freddie debuts latest risk transfer offering

Freddie Mac has a new way to transfer multifamily mortgage credit risk. It has now settled its first offering of Freddie Mac Multifamily Structured Credit Risk (SCR) Notes.

The US$52m SCR Notes Series 2016-MDN1 deal transfers a portion of the credit risk on certain multifamily mortgage loans backing targeted affordable rental housing tax-exempt bonds guaranteed by the GSE. While the first-loss credit risk is transferred to private capital markets credit investors, Freddie Mac retains the senior loss credit risk.

Freddie Mac says that it intends to continue to evolve its multifamily securities offerings with more products and features. The GSE expects to have one or two SCR offerings per year and to expand the programme over time.

RMBS

Countrywide pay-outs 'positive'

A New York Supreme Court decision last week ordering trustee BNY Mellon to make US$7.9bn worth in cash payments to Countrywide bondholders will benefit RMBS investors, says Moody's in its latest Credit Outlook. The court's order set out payments to be made to 512 trusts for their June distribution dates, but proceedings are ongoing on the 18 remaining trusts (SCI 12 May).

Moody's believes that the decision is credit positive because it clarifies payment priorities in the RMBS transactions and hastens the disbursement of funds to bondholders. The court will hear arguments for stakeholders on the remaining trusts at an unconfirmed later date, where it will address ambiguities in their governing documents. This will likely see the release of an additional US$600m in settlement funds to these trusts, pushing the settlement figure up to a total of US$8.5bn.

The approval will finally see the release of the funds that Bank of America has already paid to the trustee. The bank, which purchased Countrywide in 2008, has held the funds in escrow on the affected investors' behalf, pending the court's decision. The average distribution to RMBS trusts is US$16m, with approximately 100 deals receiving more than US$25m and two receiving more than US$100m.

The decision to follow an agreed-upon distribution plan comes after a proposal was drafted by the trustee in an earlier petition to the court in response to an initial investor proposal. In the proposal, a majority of investors approved the same interpretations of the waterfall payment priorities for the Countrywide RMBS that the court has adopted.

Prior to this proposal, the trustee in February had asked the court for guidance in the interpretation of the transactions' payment priorities. These priorities saw the deferred disbursement of settlement funds beyond the 1Q16 payment date that bondholders had initially expected.

The original settlement agreement, which the trustee and 22 institutional mortgage bond investors negotiated in 2011, alleged that Countrywide had breached representations and warranties and mortgage servicing standards in the run-up to the 2008 financial crisis.

RMBS

ITB RMBS resilient

Investment Trade Bank's (ITB) fall into temporary administration has not had a substantial effect on the performance of its Russian RMBS, Moody's reports. The transactions have not experienced any significant change regarding servicer disruption, commingling issues or note payment disruption.

A servicing transfer was initiated for two of ITB's three transactions after it went into administration, resulting in the two deals successfully transferring to DeltaCredit Bank - the replacement servicer. ITB has also continued to repurchase defaulted from loans from the pools of the three separate transactions.

"This is credit positive for the Russian securitisation market, as it sets a precedent and provides assurance to investors that when a servicer defaults, it's likely that the transfer will be smooth with no disruption to the note payments," says Maria Divid, an avp and analyst at Moody's.

The agency explains that the robustness of the back-up servicing arrangement was confirmed when the servicer went into administration and subsequently triggered a well-executed servicing transfer for the two deals. The agency adds that the deals' main performance drivers are the recession in Russia and the originator's weaker than average underwriting standards, rather than ITB going into administration.

In fact, the drop in performance was underway prior to the administration announcement and actually improved at the time of administration. The timely appointment of a temporary administration and the prevention of the bank's bankruptcy led to just a two-week moratorium imposed on the bank's accounts, including the collection accounts for the transactions.

RMBS

Small-value sales due

The New York Fed's open market trading desk intends to conduct two small-value agency MBS sales operations on 25 May and 1 June, beginning at around 2pm ET and ending at 2:30pm ET. The total current face value of sales across the two operations will not exceed US$150m.

The desk has published an operating schedule, detailing the date, time, operation type, securities and maximum sale amount for each exercise. The bank says that the exercises are "a matter of prudent advance planning" and notes that it is permitted under its operating policy to undertake certain open market and foreign currency transactions for the purpose of testing operational readiness.