Contents

Secondary markets

Euro secondary patchy

Activity in the European securitisation secondary market remains very patchy.

Despite a positive end to last week that saw spreads tick in and a continuing strong tone in to this, ABS/MBS continues to see highly selective trading. While there is little BWIC activity, what flows there are have so far this week been focused on prime assets.

Similarly, tone remain positive in CLOs though spreads edged out in some parts of the stack towards the end of last week they have held firm across the board since Friday's close. Volumes both on- and off-BWIC continue to outpace other European sectors.

There are currently three BWICs on today's European schedule. All of which are CLO auctions.

At 15:00 London time is a four line €22m equity list comprising: GRENP 2006-1X M, HARVT 9X SUB, HOLPK 1X SUB and QNST 2007-1X F. Only HOLPK 1X SUB has covered on PriceABS in the past three months - at M60S on 4 March.

At 15:30 there is a single €3.9m line of HARVT IV B1. The double-A bond last covered on PriceABS at 95H on 5 May.

Also at 15:30 are four single-Bs totalling €14.85m - AVOCA 14X F, HARVT 12X F, JUBIL 2015-15X F and PENTA 2015-2X F. None of the bonds has covered with a price on PriceABS in the past three months.

Secondary markets

US CLOs seeking stability

The US CLO secondary market is still trying to find a more stable footing following the conclusion of the IMN conference early last week.

"The market has slowed recently, but it's been moderately active so far today," says one trader. "There are a fair number of auctions today, including a chunky triple-A list."

The trader continues: "Investors have taken a bit of a pause in general over the last fortnight. You could say that the market is taking a breath following the rally since February."

The lull is not expected to draw out for long, however. "There's plenty of interest out there and money is waiting on the sidelines," the trader says. "I think we'll soon get a better idea of where the market is going once people fully get their heads around the conference fallout."

There are six lists on the US CLO BWIC calendar for today so far. This includes the above-mentioned triple-A list, which is due at 13:00 New York time.

The nine line $144.5m auction comprises: APID 2015-21A A1, BSP 2015-VIA A1A, CECLO 2014-21A A1B, CIFC 2014-1A A, CIFC 2014-5A A1, LCM 19A A, MDPK 2014-12A A, SCOF 2015-2A A and VENTR 2014-17A A. Two of the bonds have covered with a price on PriceABS in the past three months, last doing so on 19 April as follows: CECLO 2014-21A A1B at 98.6 and VENTR 2014-17A A at 99.435.

Secondary markets

Euro secondary picking up

European ABS activity is picking up as market sentiment improves.

"Right now activity is actually pretty decent. The last couple of days have seen a few bid-lists as dealers have become more aggressive in looking at paper," says one trader.

The trader notes that market participants appear to be becoming more relaxed about the UK's upcoming EU referendum. This is being reflected in a greater willingness to make purchases.

He adds: "There have been a few positions in the last couple of days which we have tracked and seen getting marked up by five or so cents in the follow. Sentiment has picked up this week and it is getting stronger."

Secondary markets

Euro secondary strengthens

The European securitisation secondary market is continuing to strengthen.

"Market tone continues to be strong in our market thanks in part to the current positive wider credit environment," says one trader. "However, it remains difficult to source paper as everybody is holding on to what they have."

The trader continues: "Flows are still thin, while primary and secondary supply is falling short of demand. So, overall technicals are good and that is supporting spreads across the board."

In particular, the trader notes: "Recent positive news around Greece, Portugal and Spain is bringing peripheral spreads in. At the same time, CLOs are going quite well too."

There are currently four BWICs on the European schedule for today. At 14:00 London time there is a €7m four line double-B and equity CLO list. It comprises: AVOCA 14X SUB, HARBM 8X E, JUBIL VIII-X E and NEWH 1X SUB. Only AVOCA 14X SUB has covered on PriceABS in the past three months - at 71H on 9 March.

At 14:30 there is a €26.3m original face single line of SANFI 2006-1 D. The Spanish consumer ABS tranche last covered on PriceABS at 93.5 on 10 March.

At 15:00 there is a $3.4m slice of ALME 3X PTC. The CLO equity piece has not covered on PriceABS in the past three months.

Also at 15:00 is a six line €16.2m peripheral RMBS list comprising: BCJAM 3 D, RHIPG I D, RHIPO 9 C, RHIPO 9 D, SESTA 2 B and UCI 16 C. None of the bonds has covered on PriceABS in the past three months.

In addition, there is a 31 line mixed peripheral OWIC due by 14:00. It involves up to €50m each of: ATLSM 5 A, AYTCH II A, AYTGH VIII A2, BCJAF 8 A, BCJAF 9 A2, BCJAM 2 A, BCJAM 4 A3, BFTH 10 A2, BFTH 11 A2, BFTH 13 A2, BFTH 6 A, BVA 2 A, BVA 3 A2, CLAB 2006-1 A, COMP 2012-3 A, DOURM 1 A, FSTNT 9 A1, FSTNT 9 A2, HIPOT 4 A, KUTXH 2 A, LUSI 1 A, LUSI 2 A, MAGEL 2 A, RHIPG I A, RHIPO 6 A, RHIPO 7 A1, RHIPO 9 A2, SABA 1 A2, SHIPO 2 A, TDAC 4 A and TDAI 3 A.

Secondary markets

US CLOs still bearish

The US CLO secondary market continues to show bearish tendencies this week as traders wait and prep for a busy summer ahead.

"There's some money waiting to come into the market, but there's currently a broad consensus that a correction is taking place," says one trader. "At the same time, secondary activity has increased beyond BWICs and we're seeing a lot offers currently coming out of competition."

There is also a shift in focus developing out of the expectation that the current rally in the market won't last much longer. "Right now there are some bigger 2.0 pieces moving around," the trader says. "But there's also some renewed interest in 1.0s, which is particularly strong surrounding shorter equity pieces."

The trader continues: "This has all contributed to pick up in flow as the end of the month edges closer. Players are positioning themselves for June and I don't expect it to be a quiet summer."

There are nine BWICs on the US CLO calendar for today so far. The largest is a three line US$112.25m triple- and double-A auction due at 12:30 New York time. The list comprises: OCTR 2007-2A A1V2, OCTR 2007-2A A2 and OCTR 2007-2A A3. None of the bonds has covered on PriceABS in the past three months.

Structured Finance

SCI Start the Week - 23 May

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

Pipeline
ABS additions to the pipeline carried on last week at a good pace, as 11 such deals joined. There was also a single ILS and five RMBS.

The ABS were: US$513m Ally Auto Receivables Trust 2016-3; US$364m Avis Budget Series 2016-2; €5bn BPCE Consumer Loans FCT 2016-5; US$425m CBC Insurance Revenue Securitization Series 2016-1; US$861.88m CNH Equipment Trust 2016-B; GMF Floorplan Owner Revolving Trust Series 2016-1; US$1.282bn Honda Auto Receivables 2016-2 Owner Trust; US$340m Massachusetts Educational Financing Authority Issue J Series; US$375m Mercedes-Benz Master Owner Trust Series 2016-A; US$375m Mercedes-Benz Master Owner Trust Series 2016-B; and Swiss Credit Card Issuance 2016-1.

US$100m Laetere Re 2016 was the sole ILS. The RMBS were US$536m Colony Starwood Homes 2016-1, €900m HT Abanca RMBS I, US$300m New Residential Mortgage Loan Trust 2016-2, US$627m STACR 2016-HQA2 and Towd Point Mortgage Trust 2016-2.

Pricings
More than a score of deals left the pipeline. As well as eight ABS prints there were also four RMBS, six CMBS and four CLOs.

The ABS were: US$1.2bn Drive Auto Receivables Trust 2016-B; €380m FADE Series 21 Tap 1; £300m Greene King Finance Tap 3; US$751m Hyundai Auto Lease Securitization Trust 2016-B; US$253.5m LEAF Receivables Funding 11; US$1.17bn Nissan Auto Lease Trust 2016-A; US$380m SoFi Professional Loan Program 2016-B; and US$600m Synchrony Credit Card Master Note Trust Series 2016-2.

The RMBS were: £3.2bn Duncan Funding 2016-1; €630m Essence VI; A$500m Firstmac Mortgage Funding Trust No.4 Series 2-2016; and US$375m Holmes Master Issuer Series 2016-1.

The CMBS were: US$222.3m A10 TAF 2016-1; US$876m BACM 2016-UBS10; US$755.7m CGCMT 2016-C1; US$767m CSAIL 2016-C6; US$750.6m GSMS 2016-GS2; and C$400m REAL-T Series 2016-1.

Lastly, the CLOs were: €360m Aurium CLO II; US$356m Newfleet 2016-1; US$608.3m Wind River CLO 2016-1; and US$403.2m York CLO.

Markets
Investor demand for US ABS "remained overwhelming" last week, according to JPMorgan analysts, as primary market oversubscription caused spreads to grind tighter. They add: "Freshly minted bankcard ABS from last week traded 5bp tighter this week. Even in off-the-run sectors, secondary trade prices on Taco Bell's inaugural ABS earlier this month jumped to over US$101 from par at new issue on the first trading day."

Bank of America Merrill Lynch analysts note that there has also been a surge in European ABS and RMBS activity, largely driven by UK issuance. "While UK supply dominates the European markets in volume, the rest of Europe is not totally dormant - a German, a French and a Swiss deals vie for investor attention. Deals structured for retention are out there too." Activity is expected to cool off next month as the industry meets in Barcelona and the UK referendum on EU membership is held.

Editor's picks
Call for clarity: Banks' diminished market-making capacities and shrinking inventories are taking their toll on liquidity, particularly in the ABS and structured credit markets. However, a lack of clarity over valuations may also have a role to play in the liquidity debate...
Upgrades boost Spanish RMBS: The Spanish RMBS sector continues its recovery, with Moody's 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...
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...
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..."

Deal news
• 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.
• 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.
• 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.
• 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 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 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 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.
• 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.

Regulatory update
• 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.
• 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.

Structured Finance

'Wrong' Madden verdict 'should stand'

The US solicitor general says that the controversial decision in Madden v Midland Funding (SCI passim) was incorrect and "reflects an unduly crabbed conception of [National Bank Act] pre-emption". However, the solicitor general does not believe that the decision should be reviewed by the Supreme Court.

A Mayer Brown client memo notes that the solicitor general "concluded that this just is not the right case for the court to resolve the important questions of whether and under what circumstances the National Bank Act pre-empts state usury laws for assignees of loans made by national banks". The solicitor general was invited by the Supreme Court to file an amicus brief, and was joined in this by the Office of the Comptroller of the Currency (OCC).

The brief argues that a national bank's authority to charge interest up to the maximum permitted by its home state encompasses the power to convey the right to enforce the interest rate term of the agreement to an assignee. However, there are three reasons as to why the court should not review the case.

First, the solicitor general and OCC agree with Madden's argument that there is no split among the circuits, disagreeing with Midland's assertion that the Second Circuit's decision conflicted with decisions by the Fifth and Eighth Circuits. They say the questions presented in those other cases were significantly different.

Second, the solicitor general and OCC say that deficiencies in the court of appeals' pre-emption analysis may be attributable in part to the parties' failure to present the full range of pre-emption arguments. They say Midland's counsel did not specify how the pre-emption analysis should work and failed to cite the relevant section of Title 12.

Third and finally, the solicitor general and OCC note that the current decision is interlocutory and that Midland might prevail even if the Second Circuit decision stands. This could be either because the district court might hold that the choice of law provision in the credit agreement made Delaware law apply under general conflict of laws principles, without regard to federal preemption, or because the district court might conclude that the valid-when-made rule is embedded in New York's usury law, providing Midland with a state law defence.

Mayor Brown notes that the Supreme Court does not have to take the solicitor general's advice and has in fact granted reviews against the solicitor general's advice in several recent cases. Both Madden and Midland will have an opportunity to file supplemental briefs responding to the solicitor general's views and the Supreme Court will then consider the case, quite possibly at its conference on 23 June, with a decision on whether or not to review the case possibly making the 27 June order list.

"Even if certiorari is denied in Madden, the solicitor general's and OCC's full-throated defence of the authority of a national bank assignee to fully enforce validly-originated loan terms is promising. It suggests that the solicitor general and the OCC might support certiorari in a future case in which a lower court followed Madden," says Mayer Brown.

The memo continues: "More importantly, these authoritative views of the government agency charged with enforcing the relevant statutes can be cited in lower courts - and should be persuasive in arguing that Madden should not be followed, at least outside the Second Circuit. (Even within the Second Circuit, the solicitor general's discussion of the key arguments not presented to the Madden panel could persuade a subsequent panel, or the en banc court, to adopt a different view.)"

JL

Transparency drive

Robert Vincini, head of pricing service specialists at Thomson Reuters, answers SCI's questions

We've been in this business for about 25 years now. Over the years we have grown our staff and broadened our asset class coverage. Our coverage is global and we now price approximately 2.6 million securities on a daily basis.

Our main focus today is increasing transparency into our fixed income evaluated prices. We have invested heavily in several initiatives, including the development of a TRPS Score supporting our evaluations. Transparency continues to be a hot topic for the majority of our customers.

Q: Do you focus on a specific group of assets or do you cover the whole spectrum? Do you have plans to broaden your scope?
A: Thomson Reuters Pricing Service covers the whole spectrum of fixed income asset classes, including traditional sovereign, corporate, US municipals, money markets, bank loans, securitised assets and mortgage products (MBS pools). In addition, we specialise in harder-to-value assets, such as CLOs, CDOs, structured notes and derivatives.

We recently expanded our coverage to include peer-to-peer (P2P)/marketplace loans (MPL) and reverse mortgage pools (HMBS). More recently (2Q16), we added coverage on reverse mortgage CMOs (HREMICs).

We are continually broadening our coverage scope as our customer investment strategies change.

Q: How do you differentiate yourself from your competitors?
A: We believe the breadth and depth of our asset class coverage and quality of our evaluations differentiates us from our competitors. Evaluation transparency is extremely important - many of our client output files include inputs used to derive the price. We also offer direct access to our evaluators, should a customer have a query, fast turn-around time for price challenges (typically within 24 hours), coverage of hard-to-price assets, access to market data and delivery tools and integration.
We also have a large contribution network through Thomson Reuters Eikon desktop. There are roughly 300,000 contributed prices coming through on a daily basis. Our evaluators incorporate this information into their evaluations.

The DataScope platform provides our clients with multiple delivery options, ease of use and a browser to search content.

Q: What challenges and opportunities does the current regulatory environment bring to your business? How do you intend to manage/take advantage of them?
A: TRPS is working with customers to ensure that we are well positioned for regulatory changes.

Transparency continues to be an industry concern. We must ensure customers have sufficient visibility into the inputs used in our evaluations to keep pace with market changes and developments. These need to be delivered in a format they can consume.

Additional content will be made available for clients via DataScope and will be applied throughout 2016 in quarterly product releases. This will include additional transparency fields, increasing the number of asset classes included in transparency, a continuation of our intraday enhancements and the enhancement of our next-generation price challenge tool, Ask TRPS.

In response to the US SEC's money market reform, TRPS is actively engaged with customers to determine the frequency of additional snap times and price delivery of money market instruments.

In response to the SEC's proposed changes to management of liquidity risk, TRPS is preparing to roll out the TRPS score, which is designed to provide customers with a numerical representation of the TRPS price. The TRPS score will be based on a scale of 1 to 10.

The score considers the factors associated with the instrument's evaluation, including quantity and quality of trade prices and dealer quotes, bond structure and TRPS internal quality measures. A score will be derived for each component and the final score will represent the weighted aggregate score of each component.

The first phase of the TRPS Score - which covers government and corporate bonds - is scheduled for release by the end of 2Q16. The second phase, which will include securitised assets, will be released later this year.

Q: Which asset class do you consider most problematic/difficult to value in the current climate and why?
A: I wouldn't say we have issues with any particular asset class. Market volatility will always bring challenges, but I think TRPS has demonstrated strengths in price quality and coverage throughout these times of stress, such as the recent volatility in US CLOs and energy (oil and gas) credits.

Q: How are you dealing with cyber security?
A: We take cyber security very seriously. We have a brand to protect, one that includes a global news service, as well as our pricing and valuations business.

We have a specialist team in our St Louis data centre responsible for cyber security. They monitor our systems 24/7, looking for abnormalities. They periodically carry out tests where a third party is brought in to test the security of our systems. Reviews are done frequently and preventative measures put in place.

Q: What major developments do you expect/would you like to see from the evaluated pricing industry in the near future?
A: As the SEC and other regulators continue to examine market practices and asset management activities, TRPS sees regulatory developments driving industry topics. Examples include the SEC review into Treasury market practices and requiring securities to be 'bucketed' based on liquidity for mutual funds and ETFs.

Access to private offering deal documents and performance (remittance) reports continues to be an industry challenge. Hopefully a concerted industry push to provide third parties access to private information will help the pricing needs of our customers.

Q: What developments can the industry expect to see from your service in the near future?
A: From an operational perspective, TRPS is investing in several areas in 2016. This includes additional transparency in DataScope on all asset classes - adding downloadable fields that clients can easily access.

We're also enhancing our new, rebranded DataScope Select price challenge portal, Ask TRPS. This will improve transparency in price challenges and automated deep dive requests.

From an asset class perspective, TRPS has immediate plans to further expand coverage in reverse mortgage instruments - HMBS and HECMs. Other key developments include enhancing our current coverage of certain hard-to-value/esoteric ABS deals and expanding our deal coverage universe of European ABS. As the MPL industry continues to evolve, we expect to enlarge our P2P loans valuations offering.

AC

Structured Finance

Insurance risk specialist hired

Miller has recruited Benjamin Gibbons in a business production and senior broking role, where he will develop its credit and political risks offering. Gibbons specialises in structuring credit risk insurance policies for banks in line with Basel 3 capital adequacy standards.

He was previously leader of a financial institutions team within the political risks and structured credit practice at Marsh. In his new role, Gibbons will work with James Cunningham and Miller's other credit and political risk specialists at its London headquarters.

Structured Finance

Due diligence firm promotes pair

Clayton Euro Risk has promoted two directors to its board. Michael Chadwick and David Avent both take seats on the UK boards of the due diligence firm and of Clayton Holdings UK.

Chadwick is md of operations. He joined Clayton in 2008, having previously held senior underwriting roles at Deutsche Bank, Lehman Brothers and the London Mortgage Company. He is responsible for deal delivery, data analytics and quality control.

Avent has been promoted to cfo and svp. He joined the firm in 2012 after 11 years as finance director for Jardine Lloyd Thompson's Profund Solutions division. He is responsible for Clayton Euro Risk's finance and compliance.

A number of executives from Clayton's US parent Radian Group have also joined the boards of the UK businesses. These include Derek Brummer, Lorenz Schwarz, Jeff Tennyson and Frank Hall.

Structured Finance

BDC buys out rival

Ares Capital is set to acquire American Capital in a deal that will form a combined company worth more than US$13bn of investments. The board of directors for both companies unanimously approved the merger, with American Capital shareholders set to receive US$3.43bn in cash and stock consideration as a result.

The announcement coincides with a separate decision for American Capital Mortgage Management to be sold off to American Capital Agency for US$562m. The collective sales accumulate to US$4bn for shareholders, or approximately US$17.4 per share - an 11.4% premium to American Capital's closing price on 20 May.

Ares Capital is offering US$6.41 per share to American Capital shareholders for its own acquisition, plus 0.483 of its shares for each share of American Capital. The conclusion of the transaction will see Area shareholders own around 73.9% of shares, with American Capital shareholders keeping hold of the remaining 26.1%.

Ares Management will also provide financial support for the transaction in the sum of US$275m. The company at closing of the deal will continue to be externally managed by Ares Capital Management, while all current Ares Capital officers and directors will remain in their roles.

Ares says that the move will provide diversification of its balance sheet and increased access to lower cost capital from banks. The acquisition will also support its attempts to expand its origination capabilities, notably the ability to produce larger transactions.

"The growing demand for capital from middle-market borrowers has created the need for flexible capital providers like us to fill the financing gap as banks continue to retrench from the market," says Michael Arougheti, co-chairman of Ares Capital's board.

The transaction is subject to American Capital and Ares Capital shareholder approvals, along with the regulatory go-ahead and the successful completion of the sale of American Capital Mortgage Management to American Capital Agency.

On the assumption that these requirements are satisfied, the deal is expected to close within the next 12 months. Wells Fargo and Bank of America Merrill Lynch served as financial advisors to Ares Capital. Goldman Sachs and Credit Suisse advised American Capital.

Structured Finance

Credit pro recruited

Capula Investment Management has hired Daniel Escobar as a portfolio manager. Escobar joins the firm following his departure in February from BlueCrest Capital Management, where he had also been a portfolio manager. He has also held similar roles for Arrowgrass Capital Partners and Deutsche Bank.  

Structured Finance

Structured credit effort strengthened

Alexey Dronov has rejoined MARV Capital as md and head of structured credit sales and trading. He will lead the sales team and expand the firm's initiatives in the structured credit market, especially the secondary CLO market.

Dronov was previously a trader and an associate portfolio manager at Highland Capital, where he helped manage a portfolio of CLOs. Along with his team, he was responsible for the analysis and trading of a large portfolio of mezzanine and equity CLO investments over the course of three years. He also played a key role in constructing and placing several CLOs under the ACIS shelf.

Before that, Dronov was a director at MARV Capital for three years. He has also worked at Calyon, Morgan Stanley and Deutsche Bank in CLO and CSO structuring and modelling roles.

Structured Finance

Diversified income beefs up

The PIMCO Diversified Income portfolio management team has been bolstered with the addition of Dan Ivascyn (PIMCO's group cio and portfolio manager) and Alfred Murata (md and portfolio manager). They join Curtis Mewbourne (md and portfolio manager) and Eve Tournier (evp and head of pan-European credit portfolio management) as co-managers on the strategy. Mewbourne will retire from PIMCO at end-September after a 17-year career at the firm.

Ivascyn is lead portfolio manager for PIMCO's income strategies and credit hedge fund and mortgage opportunistic strategies. He is a member of the firm's executive committee and a member of the investment committee.

Murata is based in the Newport Beach office and is a member of the mortgage credit team. Tournier is based in the London office.

Structured Finance

Media financing firm secures funds

Crayhill Capital Management has agreed to finance a new firm called Versa Media, which has been set up to provide production loan financing to independent film and television creators. The new firm has secured a US$100m financing facility from Crayhill and will generate future means of financing through structured finance.

In addition to traditional subordinated production loans - including mezzanine, gap and tax credit loans - Versa will be the first institutional lender in the industry to specialise in bridge financing. The company has been founded by Jeff Geoffray, Jeffrey Kovitz and Daniel Rainey. Geoffray previously co-founded and ran Blue Rider Finance, which similarly held a focus on bridge financing.

On top of providing capital solutions, Versa will proactively work to structure and close the production financing, often acting as an executive producer to assist content creators in completing their films. The team expects to finance approximately 15 to 20 projects per year.

Qualia Legacy Advisors served as Versa's financial advisor on the transaction.

CMBS

CRE pro launches firm

Former Avison Young principal David Eyzenberg has launched his own firm, Eyzenberg & Company, of which he is managing partner. The firm is a New York-based real estate investment bank, providing bespoke financial services to consumers and providers of CRE capital. Three associates have joined the firm to assist with transaction execution.

Additionally, Eyzenberg remains a partner at Anika Equities GLF, which is a private equity platform that seeks opportunities to create and purchase ground leases on CRE assets.

He was US lead for debt, joint venture and structured capital at Avison Young, overseeing a team responsible for the origination and execution of real estate investment banking transactions. Before that he was md, head of commercial real estate at NewOak Capital and has also worked at other firms including Prodigious Capital Group and Madison Capital Group.

Risk Management

Pricing exec recruited

Markit has appointed Frank Dos Santos as head of North America business strategy for its fixed income pricing services. With nearly 30 years of fixed income experience, he joins the firm after 13 years at S&P, most recently as global head of oversight, methodologies and analytical excellence for securities evaluations.

Markit's fixed income pricing service provides independent pricing, transparency and liquidity data for fixed income instruments to support risk management, price verification, compliance and trading workflows. The service combines a team of over 100 fixed income experts with daily coverage of 2.5 million instruments, including securitised products and CDS.

RMBS

Mortgage servicer shuffles staff

Following its acquisitions of Homeloan Management (HML) in November 2014 and UKAR's mortgage servicing activities earlier this month (SCI 10 May), Computershare is set for a restructure. From next month, UKAR's 1,700-strong staff will transfer to Computershare's new Loan Services business, including UKAR ceo Richard Banks.

Former HML ceo Andrew Jones will become ceo of Computershare Loan Services, while Banks will be deputy ceo. Naz Sarkar will continue as Computershare ceo in the UK.

Later this year, HML will be re-branded as Computershare Homeloan Management. Andrew Freeley, previously proposition director, will lead the division and report to Jones.

ABS

Subprime auto loans lengthening

Recently rated US subprime retail auto ABS deals have been seeing an increasing amount of longer-term loans in their pools, according to S&P. The agency says that the great number of these loans is leading to more back-loaded losses and longer loss curves.

The S&P Global Ratings subprime index shows a 76% rise in the percentage of loans with original maturities exceeding 60 months. There has been a 78% hike for the 2011 vintage from approximately 44% for the 2003 vintage. Since then, the percentage has remained generally stable at approximately 80%.

Subprime borrowers generally finance their vehicle purchases because they have limited monthly income. As car values have swelled over the past eight years, financing companies have offered loans with extended terms to make them more affordable, so that the obligor's monthly payment averages about US$400 to US$450 per month.

While the percentage of loans with terms greater than 60 months has remained stable since 2011, S&P expects loans with 72 month terms to remain the predominant loan term. In addition, it says that the percentage of loans with 73 to 78 month terms in subprime pools will continue to increase, after they were originally introduced in 2013.

The longer loan terms could signal some troubles for the market, including potentially increased loss severities. When amortisation of the loan balance is spread out over a longer term, S&P notes that the point at which the obligor gains an equity position in the car is delayed. As the loan term extends, the average balance will be higher at the time of repossession or charge-off, thereby reducing the recovery rate and increasing severity potential.

Another issue may be the increase in back-loaded losses, as these losses extend for a longer period of time. S&P formed an index on issuers of subprime retail auto ABS in 2003 and 2011, showing that the percentage of loans with terms greater than 60 months more than doubled in the 2011 vintages. Comparing the two vintages also shows a loss curve that is slower and longer for the 2011 vintage.

ABS

Aquila broadens investor access

Aquila Capital is providing institutional investors with access to its latest renewable energy portfolio - Aquila Capital Renewables Fund III - via securitisation. According to the asset manager, the securitisation has been given an indicative investment grade rating by an ESMA-recognised rating agency, with the target of a final single-A minus rating.

Combined, the securitisation and a direct investment in the fund provide investors with access to Aquila's diversified portfolio of wind and photovoltaic plants in politically stable countries in Western Europe. The fund is already invested in 13 operational renewable energy plants in Sweden, Germany, the UK and France, and benefits from a pipeline of potential investments in excess of €350m.

Aquila ceo and co-founder, Roman Rosslenbroich, says that the securitisation was prompted by significant demand from investors. The firm also notes that it is receiving requests for it to adopt additional securitisation solutions for its renewable energy infrastructure funds.

Structured Finance

Debut GBA assigned

Moody's has assigned its first green bond assessment (GBA) of GB1 to Green Storm 2016, a green Dutch RMBS originated by Obvion (SCI 24 May). The GBA represents a forward-looking transaction-oriented opinion on the relative effectiveness of the issuer's approach to allocating assets to and reporting on environmental projects financed by proceeds from green bond offerings.

"Our GB1 grade for Obvion's deal reflects the excellent environmentally-oriented approach to managing the conservatively selected pool of Dutch residential mortgages, based on the adherence of their energy efficiency coefficients to energy labelling standards for new homes in the Netherlands," says Henry Shilling, an svp at Moody's.

The securitisation's pool consists of prime Dutch energy-efficient mortgage loans. Together with targeting dedicated green investors, the deal aims to promote energy efficient residential housing, in line with Obvion's mission to increase energy efficient residential housing.

The GB1 grade, Moody's highest, is driven by the lender's adoption of an effectively constructed objective methodology and criterion to evaluate and select the residential buildings for its green RMBS based on accepted energy labelling standards for new residential buildings that have been in place in the Netherlands since 1995. The pool includes residential mortgages backed by buildings that qualify as energy-efficient under the Green Bond Principles and the more rigorous Climate Bonds Initiative Low Carbon Housing Standard for residential buildings, as well as energy efficiency upgrades in residential buildings.

Calcassa figures indicate that about 70% of the portfolio consists of mortgages that fit in the category of the highest energy performance certificates, about 20% fit in the second-highest category and 3.8% of the pool consists of underlying properties with energy performance certificates at the next level, which have experienced significant energy efficiency improvements. Based on this analysis, using both actual and theoretical average gas consumption, the provisional pool shows a CO2 reduction of 861 tons per year/4,605 tons per five years (or a 14% reduction) and 2,684 tons per year/13,420 tons per five years (or a 34% reduction) respectively, according to DWA. However, this is subject to change, as the pool of mortgages will experience prepayments estimated by Moody's at 15% per annum over the term of the transaction.

The transaction's class A notes are being offered in the market with a final maturity of October 2052 and a first optional redemption date in July 2022.

Structured Finance

Academics urge CMU rethink

A group of academics have signed off on a letter to the European Parliament that asks MEPs to consider the ramifications of reviving the securitisation market by passing the bill for a Capital Markets Union (CMU). The letter was sent prior to a meeting in Brussels today by the Committee on Economic and Monetary Affairs to discusses proposals for securitisation regulations.

The letter outlines the academics' concerns as fourfold, resting on the core argument that the bill for simple, transparent and standardised (STS) securitisation would reverse many of the lessons learnt from the financial crisis. It accuses the proposals of representing the banks' best interests first and says that this "smacks of letting profitability concerns prevail over stability considerations".

Concerns include the fear that the bill would prop up another real estate bubble by boosting already used and abused assets within MBS. The letter also outlines the academics' scepticism surrounding the Commission's claims that the CMU would diversify risk and stabilise the financial system. It specifically notes that the buyers of securitisations are already strongly connected to banks through repo markets, something that would be strengthened further through securitisation channels.

"The promotion of non-bank credit intermediation, which is the official goal of CMU, in fact boils down to a regulatory subsidy for market-based banking and will increase interconnectedness, procyclicality and leverage," the letter suggests.

The third issue challenges the specificity of STS, noting that tranching would still be "fully allowed", and that CDS and interest rate swaps would still be obliged. According to the academics, this signifies continued complexity, not simplicity.

The final concern flags up the risk retention requirements, arguing that the 5% requirement is not substantially high enough. The letter describes the proposed requirements as "too lax and too arbitrage prone". It adds that to address any conflicts of interest, sophisticated investors demand at least 20% skin in the game.

Rabobank credit analysts understand that the letter is co-drafted by Ewald Engelen, a University of Amsterdam professor and a visible person in the Dutch media. They note that he is known for his critical stance towards banks and securitisation.

The letter follows the release of a working document by Paul Tang (SCI 23 May), the lead lawmaker on the bill for STS securitisation. Among Tang's proposals included a move to greater market transparency through the implementation of a public register.

Structured Finance

MBIA-wrapped bonds downgraded

Moody's has downgraded 162 classes of structured finance securities wrapped by MBIA Insurance Corporation. The action follows the downgrade of the insurance financial strength (IFS) ratings of MBIA Insurance Corporation to Caa1 from B3, with a negative outlook.

The downgrade of MBIA Corp's IFS rating reflects the insurer's weak liquidity and capital position, and increasing risk of default on insurance obligations, in light of continued uncertainties and material risks associated with the Zohar II CLO transaction it insures. The default of Zohar I in November 2015 resulted in MBIA Corp making a US$149m claims payment to insured noteholders, which meaningfully reduced its liquidity position (SCI 23 November 2015).

Given the correlation between the Zohar I and Zohar II deals, Moody's believes that Zohar II is also likely to default upon maturity, in January 2017, triggering a claim of up to US$776m on MBIA Corp. The agency suggests that a claim of this size would exhaust MBIA Corp's current liquidity that consisted of approximately US$278m of liquid assets as of 31 March 2016. MBIA Corp, however, believes that it can access sufficient liquidity to satisfy any Zohar claim through a combination of collateralised loans and the sale of subsidiaries.

"While MBIA Corp has been able to install a new collateral manager for the Zohar transactions, there is significant uncertainty with respect to the market value of the collateral backing these transactions and the related recovery that MBIA Corp can expect on the insured bonds," Moody's adds. "Recent commutations of insured exposures and the settlement of RMBS put-back claims have improved the firm's capital adequacy profile, but liquidity remains tight as much of the firm's statutory capital stems from expected contingent claims on excess spread recoveries on RMBS transactions and additional RMBS put-back settlement recoveries."

The majority of MBIA Corp's structured finance book is expected to run off within the next five years, freeing up capital resources. However, the firm remains exposed to a number of large structured transactions that could cause significant stress.

Moody's has affirmed the Ba1 senior debt rating of MBIA Inc and the A3 insurance financial strength (IFS) rating of its principal operating subsidiary National Public Finance Guarantee Corporation.

Structured Finance

PREPA gets first payment

PREPA reached its first agreement with creditors last week, which will see them pay an initial US$55m instalment for the US$111m bond under the restructuring support agreement. The news comes as a relief to both sides after the 12 May deadline passed without a settled agreement (SCI 16 May).

The utility received the US$55m in proceeds from the bonds on 19 May. The parties are now working together to complete the documentation for the closure of the remaining sales of US$55m refinancing bonds.

"This agreement with creditors demonstrates the continued commitment of PREPA to accomplish the transactions set out in the RSA," says Lisa Donahue, PREPA's chief restructuring officer.

Puerto Rico governor Alejandro Padilla has issued an executive order that excludes refunding bonds issued under the bond purchase agreement from the Moratorium Act. The issue had been one of the primary stumbling blocks to a financial commitment from PREPA's creditors.

Structured Finance

STS public register proposed

The success of the European Union's plan for simple, transparent and standardised (STS) securitisation hinges on reducing the 'inherent' information asymmetry and moral hazard in the market, according to a working document released by lead lawmaker Paul Tang. The paper proposes that the market could best improve transparency standards through a public register.

The register would be used to contain 'essential information' of securitisations and allow supervisors to keep track of developments in the market. The paper also describes this solution as an important safeguard whenever the market would come under stress in the future.

The paper written by Tang is motivated by a core message that outlines the importance of strong due diligence and disclosure between investors and issuers. It also contributes a part to highlighting the 'toxic cocktail' that securitisation played in causing the financial crisis.

Meanwhile, the European Commission is given credit for achieving broad support for the STS plan, but the paper warns that vague wording in the proposal could increase the risks of misinterpretation and market fragmentation. It therefore notes that the final STS criteria should be 'crystal clear' and not allow for any uncertainty or ambiguity. In addition, it stresses the need for a limited number of competent authorities in charge, with a central role for ESMA in interpreting the STS rules.

The proposed amendments could be seen as a barrier to the Commission adopting the current proposed plan by September. Tang is the leading MEP for navigating the STS bill through the European Parliament.

Structured Finance

Indian market resurgent

Indian rated securitisation issuance volume has grown by 45% in the 2016 fiscal year to around R²5,000, according to ICRA Research Services. This reverses a three-year trend in which the market had been slowly trending downward.  

ICRA says that the figures reflect the increased number and volumes of ABS deals, which rose by 39% and 51% respectively in the year. The volume of bilateral retail loan pool assignments, known as direct assignment transactions, also grew by 56% to around R42,000. In contrast, RMBS deals reportedly declined to negligible amounts.

Private sector and foreign banks continue to be the key investors in the jurisdiction, mainly driven by priority sector lending motives. This coincides with a growth in lower rated paper, driven by increased participation of small originators and the prospect of higher yield for investors. Specifically, the share of non-triple-A rated notes increased from 50% to 60% in the 2016 fiscal year.

Asset types chosen for securitisation saw commercial vehicle and construction equipment loans continue to be the largest asset class for ABS, accounting for close to half the volumes. Additionally, the share of microfinance loans increased further from 31% in the 2015 financial year to 36% this year.

The 2016 union budget announcement in India recently outlined that tax on investment income in securitised debt will be required to be paid directly by the investor. In addition, the budget allows for foreign portfolio investors to purchase notes in the market. Given these changes, ICRA expects some renewed interest in securitisation and a widening of the investor base as the market edges into the 2017 fiscal year.

Structured Finance

Dutch ABS, RMBS notes upgraded

Moody's has upgraded its ratings on two RMBS and two ABS transactions backed by loans originated by the now-bankrupt Dutch DSB Bank. The affected transactions are Monastery 2004-I, Monastery 2006-I, Chapel 2003-I and Chapel 2007.

The upgrades have been prompted by a pay-out from the DSB Bank bankruptcy estate to the issuers representing a 100% recovery on the SPV counterclaims for all DSB Bank transactions. Additionally, borrower compensation relating to duty of care claims linked to DSB Bank's lending and intermediation practices in Chapel 2003 and Chapel 2007 has been lower than expected.

The 100% pay-out for all four transactions represents a substantial increase from the 74% pay-out distributed in December 2014. "These higher-than-expected recoveries from the bankruptcy estate lead to increased credit enhancement levels in all four transactions, through either a decrease and/or a curing of the PDL, or through a replenishment of the reserve fund," notes Moody's.

The rating agency has maintained its key collateral assumptions for Monastery 2006-I, Chapel 2003-I and Chapel 2007. However, as Monastery 2004-I is performing modestly worse than anticipated, Moody's has increased expected loss assumptions from 2.2% of original balance to 2.45%.

The Chapel 2003-I A notes have been affirmed at Baa1, while the B notes have been upgraded from Ca to B3. The Chapel 2007 A2 notes have been affirmed at Aa3, while the B, C, D and E notes have been upgraded to A1, A3, Ba1 and Ba3 respectively.

The Monastery 2004-I A2, B and C notes have been affirmed at Aa3, while the D and E notes have been upgraded to Aa3 and Ba3 respectively. The Monastery 2006-I A2 and B notes have been affirmed at Aa3, while the C notes have been upgraded to Baa3 and the D notes have been upgraded to B3.

CLOs

CLO amendments implemented

The transaction documents of Richmond Park CLO have been amended in order to allow the rated notes to be held in any one of three sub-classes. The amendments were implemented last week and help to bring the deal into compliance with the Volcker Rule.

Each currently existing class of rated notes has been deemed to be in the form of collateral manager (CM) voting notes. These count towards quorum requirements with respect to resolutions relating to the removal of and selection of a replacement for the collateral manager.

The other two sub-classes are CM non-voting notes and CM exchangeable non-voting notes. Neither of these classes possess the voting rights that CM voting notes have. CM voting notes, CM non-voting notes and CM exchangeable non-voting notes are each exchangeable into the other note forms of the relevant class at any time.

CLOs

Middle-market mix to revert

CLOs, private equity firms, hedge funds and banks are expected to play a larger role in financing middle-market (MM) companies as the bulk of middle-market loans mature in 2016-2020. Moody's suggests in its latest CLO Interest publication that this mix of lenders will be more representative of the mix that was in place prior to 2007, before business development companies (BDCs) became the predominant MM lender. Nevertheless, BDCs and CLOs will likely reduce the MM loan maturity wave somewhat in the coming years by renegotiating and restructuring some loans prior to maturity.

MM debt outstanding has grown to roughly US$117bn as of 2Q15, from US$71bn in 2007. The share of non-bank lending to the sector has grown to 82% from 71% over the same period, with the number of public BDCs increasing to 52 from roughly 20, accounting for almost 70% of that growth.

However, BDCs and existing CLOs are unlikely to sustain this level of lending to MM firms in an economic slow-down as they are unlikely to be able to refinance all the maturing MM loans they hold. Several technical restraints could dampen BDC appetite for both new loans and refinancings, including regulatory asset coverage ratio (ACR) tests, which - if triggered - give lenders the option to accelerate their debt or require the BDC to cure the test by raising cash through equity financing or selling assets. BDCs are generally restricted from raising equity financing if their existing equity value trades below NAV, something most BDCs are already observing.

"Although we do not expect most BDCs to face ACR trigger test compliance issues, we do expect test levels to deteriorate in a credit downturn and BDCs to adopt a maintain-or-improve strategy with respect to these tests by limiting further MM purchases and engaging in sales of their loan investments to improve the test," Moody's observes.

Of the 17 largest BDCs, which together account for roughly 80% of the MM loans held by public BDCs, the agency estimates that roughly half have either issued MM CLOs or are affiliated with asset managers that have established reputations as CLO managers in the broadly syndicated loan space. In a downturn, when investors tend to coalesce around more experienced managers, this strategy will likely continue to work for BDCs with established reputations and relatively strong MM loan performance.

MM loans are often made by just a few lenders and have strong covenants, which increases a manager's ability to restructure and renegotiate MM loans prior to maturity. However, recent CLO transactions limit managers' ability to substitute out loans to a cumulative 15%-20% of the portfolio par value.

Moody's notes that BDCs financed about 20% of MM loan investments in 2007, with CLOs, PE firms, hedge funds and banks financing the remaining 80%. "Because they have the greatest amount of flexibility and are familiar with MM firms due to their equity participations in them, we expect PE firms and hedge funds to play a lead role in refinancing MM debt within BDCs and CLOs. Offsetting this flexibility, however, is capacity."

By 2020, roughly US$28bn of MM loan investments held by BDCs - along with US$20bn of loans in CLO portfolios that will mature after their reinvestment periods end - will need to be refinanced, according to the agency.

CMBS

Wildfire exposure gauged

DBRS has identified 12 loans across nine Canadian CMBS, with a current outstanding balance of C$145.8m, secured by properties located in Fort McMurray that are exposed to wildfires. The assets consist of five multifamily complexes, two hotels, two industrial facilities and an office property.

Although 10 of the 12 loans have recourse, six of the loans that are sponsored by Lanesborough REIT are in special servicing, with a total current outstanding balance of C$66.1m. DBRS has placed transactions with exposure to these loans under review with negative implications due to poor performance caused by economic challenges within the market and transfer to special servicing caused by imminent default.

The sponsor's exposure represents 45.3% of the total outstanding loans secured by CMBS properties in the Fort McMurray market. At this time, it is unknown how the fires have affected the ongoing workout of these loans, DBRS reports.

Cumulative exposure is contained to the below investment-grade classes for four of the affected transactions, while the remaining transactions represent higher exposure to the Fort McMurray market, most notably IMSCI 2013-4.

CMBS

CMBS loan quality turns corner

Moody's has launched a new quarterly overview of the US CRE and CMBS market. The inaugural report finds that the quality of new CMBS loans improved in 1Q16 as property prices levelled off.

"Triple-A bond spreads were volatile during 1Q16, contributing to slowing conduit loan origination," says Moody's director of CRE research, Tad Philipp. "But over the last few transactions, triple-A spreads have tightened and conduit issuers have ramped up their lending again."

Given such volatile CMBS spreads, the agency points out that life insurance companies had a competitive edge relative to CMBS for loans on high-quality properties. In total, CMBS accounted for about 20% of overall commercial lending activity last year, with about half its share at the pre-crisis peak.

"Our LTV ratio for conduit loans declined for the first time in three years in 1Q16," adds Philipp. "And we expect conduit loan leverage to stabilise during the remainder of this year, albeit at an elevated level."

Meanwhile, risk retention is set to come into effect in December of this year, but its final form is still uncertain. Moody's explains that issuance could be affected, as many buyers who retain their risk through buying subordinate bonds may have to recapitalise or restructure to comply with the new rules.

CMBS

NOI trends analysed

Moody's has published a mid-year update on net operating income (NOI) trends for the main types of collateral backing US CMBS conduit loans. The update covers the period between 2004 and 2015, and tracks year-over-year changes in same-store property financials as reported by borrowers and processed by master servicers.

The report is based on borrower financials for 2015 that were available as of 18 May 2016. Moody's analysed NOI changes from approximately 18,000 loans comprising about 60% of outstanding CMBS conduit loans.

Among the key findings is that core CMBS conduit collateral NOI exceeded its pre-crisis peak by about 1% in 2015, after falling just short in 2014. Core property NOI is now about 8% above its level at the trough.

Since its pre-crisis peak, apartment NOI has significantly outperformed commercial NOI. After dipping slightly during the crisis, apartment NOI forged ahead to top its previous peak by about 23 percentage points. Core commercial property NOI growth roughly matched that of apartment NOI until the pre-crisis peak, but has since underperformed and remains about 4% below its pre-crisis peak.

The CBD office segment is the only core commercial property sector that has topped its pre-crisis peak, by about one percentage point. Conversely, suburban office NOI has fallen about 6% below its 2004 level since the crisis.

CBD office NOI in major markets now tops its pre-crisis peak by about 4%. While NOI from non-major market CBD office properties has improved over the past few years, it remains about 7% short of its peak level.

Meanwhile, NOI for suburban office properties in non-major markets has been recovering, but continues to slide in major markets. NOI is about 8% below peak in non-major markets and about 18% below peak in major markets.

During the financial crisis, hotel NOI fell from about 20% above its 2004 benchmark level to about 20% below. The hotel sector has now recovered to a level about 17% higher than its 2004 level, but falls short of its pre-crisis peak by about 5%.

CMBS

For-profit college exposure gauged

Morningstar Credit Ratings believes that government scrutiny and poor public perception of the US for-profit education industry could intensify default risks on up to US$1.88bn in CMBS. The industry has been hit by a series of investigations and settlements that resulted in the closure of Corinthian Colleges and a 28% decline in enrolments between September 2011 and September 2015. In response, owners of for-profit campuses have shuttered entire brands and closed hundreds of locations nationwide.

Formerly a tenant in collateral backing US$82.3m in CMBS loans, Corinthian shut its entire operation in April 2015 under an agreement with the Department of Education. Morningstar projects combined losses of about US$3.2m on two loans tied to Corinthian (see SCI's CMBS loan events database).

The federal government has since turned its attention to the University of Phoenix and DeVry University over their marketing and recruiting practices, while state governments have also exercised their regulatory muscles. For example, the state of California won a more than US$1.1bn judgment against Corinthian in March.

Of the loans backed by for-profit colleges, 11 (totalling US$144.7m) are specially serviced, which Morningstar says is more than double the 3.7% rate of specially serviced loans for the entire CMBS universe in April. The agency forecasts US$51.8m in losses on nine of the loans, including a US$9.6m loss on the US$24.5m University of Phoenix asset (securitised in CD 2005-CD1), where the sole tenant - the University of Phoenix - vacated the three office buildings that backed the loan. The latest appraised value of US$17.9m is 60.7% less than the original 2005 appraised value of US$45.5m.

The University of Phoenix, which is a tenant at properties backing US$241.6m of CMBS, closed 115 locations in 2012. The university's enrolment of 179,600 in February was less than half of its 470,800 students during its peak in 2010. For year-end 2016, enrolment is expected to decline to the 140,000 student range.

Phoenix-based Apollo Education Group, which owns the brand, will be taken private by a group of investors by year-end. Apollo Education Group is the sole tenant at its headquarters, which backs a US$91.5m loan in CGCMT 2015-GC29.

Given the drop in performance for the University of Phoenix, the appraiser provided both an 'as-is' value and a 'go dark' value, which assumes the tenant vacates. The as-is appraised value of US$183m results in a 50% LTV, while the go dark value of US$122m suggests a 75% LTV.

Morningstar's largest projected loss among loans exposed to for-profit colleges is US$16.5m on the US$32m Gateway Chula Vista II loan. The asset's second-largest tenant, San Joaquin Valley College, remains a tenant and the projected loss is due to the property's history of low rents and tenants leaving.

For-profit tenants in collateral backing US$259.1m of loans have leases that expire through 2017. US$174.5m of this exposure is concentrated across three tenants: the University of Phoenix, DeVry and Strayer University. Morningstar suggests that the US$23.8m Osprey Portfolio loan has the greatest default risk because the University of Phoenix's lease expires in July 2017, four months after the loan's maturity date. In addition, the University of Phoenix had a January 2016 lease expiration at the University of Phoenix Building, which backs a US$7m specially serviced loan.

DeVry, a tenant backing US$166m of CMBS, has leases expiring in October 2016 at properties securing two loans. The brand saw undergraduate enrolment from 2010 to 2015 plunge more than 50% to 34,524 students and announced it would close 14 campuses in 11 cities in April 2015.

Strayer Education (representing US$122.6m in CMBS) is a tenant in six properties with leases expiring through December 2017. The greatest risk lies with the US$5.6m specially serviced Strayer University loan because the college's lease on 71% of the Ashburn, Virginia property expires a month before the loan's January 2018 maturity.

Although Strayer has not failed government regulations, its enrolment dropped to 43,000 for autumn 2015 from 60,700 in 2010. The brand operates 78 campuses across the US, following the closure of 20 campuses in 2013.

Notable for-profit institutions on the March 2016 heightened cash monitoring list include campuses for Education Management Corp-owned Art Institutes (US$211.3m in CMBS exposure), ITT Technical Institute (US$110.2m) and Career Education Corp-owned Le Cordon Bleu (US$39.2m).

Insurance-linked securities

Pandemic ILS prepped

The World Bank Group has launched the Pandemic Emergency Financing Facility (PEF), a global financing mechanism using ILS that is designed to protect against pandemics. It is hoped that the initiative will create the first-ever insurance market for pandemic risk.

The new facility aims to accelerate both global and national responses to future outbreaks with pandemic potential. It was built and designed in collaboration with the World Health Organization and the private sector.

The PEF includes an insurance window, which combines funding from the reinsurance markets with the proceeds of World Bank-issued pandemic catastrophe bonds, and a complementary cash window. This marks the first time that World Bank cat bonds will be used to combat infectious diseases.

The insurance window will provide coverage of up to US$500m for an initial period of three years for outbreaks of infectious diseases most likely to cause major epidemics. Parametric triggers designed with publicly available data will determine when the money would be released, based on the size, severity and spread of the outbreak.

The cash window will provide more flexible funding to address a larger set of emerging pathogens, which may not yet meet the activation criteria for the insurance window.

Japan, which currently holds the G7 presidency, committed the first US$50m in funding towards the initiative.

All 77 countries eligible for financing from the International Development Association will be eligible to receive coverage from the PEF. The PEF is expected to be operational later this year.

NPLs

Further Freddie NPLs auctioned

Freddie Mac is auctioning off its third batch of NPLs this year, a US$783m collection of seasoned residential whole loans. The NPLs are currently serviced by Bayview Loan Servicing.

The GSE is offloading the loans from its mortgage investment portfolio through seven pools, in the form of five standard pool offerings (SPO) and two extended timeline pool offerings (EXPO). Like previous auctions, the sale is targeting participation of smaller investors, including non-profits and minority and women-owned businesses.

Bids are respectively due by 15 June for the SPO offerings and 29 June for the EXPO loans. The sales are expected to settle in August and September.

Freddie sold US$4.3bn in NPLs in 1Q16 as part of its continued process of winding down its NPL book. The FHFA also announced last month that it had enhanced parts of the requirement process for NPL sales (SCI 15 April).

Bank of America Merrill Lynch and The Williams Capital Group advised Freddie Mac on this latest auction.

NPLs

China NPL deals imminent

The Chinese NPL securitisation market is set to begin re-emerging with China Merchants Bank (CMB) and Bank of China (BOC) recently announcing plans to introduce the first deals at the end of this month. This development is a credit positive for the market, according to Moody's in its latest Credit Outlook.

The deals will be the first to be issued in the Chinese market since 2008 and will provide another means for banks to dispose of their NPLs. CMB's portfolio is considered to be very granular, comprising 60,007 borrowers' unsecured credit card receivables, while the BOC portfolio has just 42 corporate borrowers - most of which have secured loans.

CMB's transaction has an outstanding principal balance representing roughly 35.1% of its credit card NPLs and 3.2% of total NPLs, as of year-end 2015. In BOC's deal, the outstanding principal balance of the securitised pool is about 1.2% of the bank's corporate NPLs and 0.9% of total NPLs as of year-end 2015.

The senior notes in the two deals are much smaller than those in a typical CLO or consumer finance securitisation in China. The small proportional issuance size reflects higher risk and volatility in NPL recoveries, as well as higher expected asset portfolio losses for both transactions than securitisations backed by performing loans.

The proposed size of the senior notes in the CMB deal is about CNY188m, or about 12.5% of the outstanding principal balance for the deal portfolio. For the BOC transaction, the proposed size is CNY235m, or about 19.1% of the outstanding principal balance for the portfolio.

Moody's believes that the planned securitisations provide particular flexibility and liquidity for retail-oriented banks, such as CMB. This is because there has been very few tools to date in the Chinese market to help banks dispose of their retail NPLs.

However, the agency says that the ability for NPL deals to shift large corporate sector loans will be limited and secondary to other channels, such as sales to asset management companies. This may leave Chinese banks seeking further solutions in their ongoing attempts to offload the large volume of corporate NPLs on their balance sheets.

Risk Management

Swap margin rules adopted

The US CFTC has adopted final rules on cross-border margin requirements for uncleared swaps. A decision was made to adopt the rules after the regulator's members voted two to one in favour, with Commissioner Christopher Giancarlo the lone dissenter.

The rules align closely with the cross-border margin requirements already adopted by prudential regulators. According to the CFTC, the rules require covered swap entities (CSE) to comply with their uncleared swaps in all cross-border transactions, with non-US CSEs excluded in certain circumstances.

These circumstances would allow CSEs to comply with similar margin agreements in foreign jurisdictions as an alternative means of complying with the CFTC's rules. However, this would be contingent on the CFTC determining that the foreign requirements are comparable to its own.

An example outlined by the CFTC includes a scenario in which non-US CSEs are not guaranteed by a US person but can still become eligible for substituted compliance. The CFTC's rules also include special provisions to accommodate swap activities in jurisdictions that do not possess a current legal framework that supports custodial arrangements to comply with the new margin rules.

With the rules set to be implemented on 1 September, the CFTC is urging market players requiring a comparability determination on a foreign jurisdiction to submit their request promptly.

Risk Management

FRTB solution offered

Markit has launched a comprehensive solution for compliance with the new market risk capital requirements in the Fundamental Review of the Trading Book (FRTB) standards. The firm says it has worked with a number of customers worldwide to define a modular platform that will enable banks to model and manage market data and risk factors, generate scenarios and perform capital calculations in line with the new framework.

The solution, which is designed to leverage a bank's existing infrastructure, comprises four modular, integrated components. The Markit FRTB Data Service includes transaction and historical pricing data sets to supplement banks' data for meeting modellability requirements, while the Markit Risk Factor Utility is a hosted platform for managing and deriving risk factors and generating scenarios for back-testing, P&L attribution and expected shortfall.

The Markit Analytics Risk Engine is a market risk calculation engine and stress-testing framework. Finally, the Markit FRTB Studio is an impact analysis tool that combines full drill-down and intraday views of risk and capital measures across CVA and market risk.

Risk Management

CCP resolution considered

The Clearing House and ISDA have issued a white paper identifying key issues that regulators should consider as they develop a comprehensive resolution framework for systemically important CCPs. The paper is intended to inform the debate begun by the Financial Stability Board (FSB) earlier this year, when it announced plans to issue for public consultation standards or guidance for CCP resolution planning, resolution strategies and resolution tools.

Due to global mandates that require standardised derivatives to be centrally cleared, it is estimated that more than 70% of swaps are currently cleared, which the two associations say has led to significantly increased concentrations of risk within CCPs. "Having devoted considerable thought and resources to ensuring the resolvability of the world's largest banks, it is now time to take the lessons learned in that process and ensure that CCPs - where much risk has been concentrated by the post-crisis regulatory regime - are equally resolvable," comments Greg Baer, president of The Clearing House Association.

"The primary focus of regulators and market participants should be on CCP resilience and developing robust CCP recovery frameworks. Nonetheless, we can't ignore the issue of CCP resolution and the impact the collapse of a CCP would have on financial stability. It's therefore important this issue is considered in depth," adds Scott O'Malia, ISDA's chief executive.

The paper, entitled 'Considerations for CCP Resolution', identifies potentially significant resolution tools or approaches for further discussion and evaluation by the official sector and industry. It attempts to both highlight and endorse the thoughtful guidance that has been codified in the FSB's 'Key Attributes of Effective Resolution Regimes for Financial Institutions' and to document and identify - from the perspective of clearing members and other clearing participants - related considerations that must be addressed in developing a workable and comprehensive resolution framework for systemically important CCPs.

RMBS

European fund targets US RMBS

BlackRock is launching Europe's first ETF investing in high quality US RMBS. The fund has been dubbed iShares US Mortgage Backed Securities UCITS ETF (IMBS) and provides access to triple-A rated RMBS issued by three agencies backed by the US government.

The underlying Barclays US MBS Index is based on a universe of individual fixed rate pools, which should ensure diversification across factors, such as sensitivity to interest rates and prepayment risk. The fund is physically replicating and has a total expense ratio of 0.28%.

RMBS

Review finds 'no evidence' against Ocwen

Duff & Phelps has conducted an independent analysis of allegations made by Gibbs & Bruns concerning non-performance by Ocwen as servicer for a number of RMBS trusts (SCI 27 January 2015). Duff & Phelps has found that none of the allegations were supported by evidence.

Duff & Phelps was engaged by Wells Fargo in its capacity as master servicer for 42 Ocwen-serviced RMBS trusts. As well as Gibb & Bruns' notice of non-performance, the firm also investigated Ocwen's consent orders with the CFPB and New York Department of Financial Services.

After a year-long review, Duff & Phelps did not find any evidence that Ocwen failed to account for P&I payments to the master serviced trusts, nor any evidence that it charged those master serviced trusts for any undisclosed or 'mysterious' expenses. The investigation found no evidence of negative NPB modifications to maximise servicing fees or evidence of modifications intended to prematurely recover advances.

The investigation did not find evidence to conclude generally that Ocwen made extreme or imprudent modifications and found that Ocwen did apply the stop advance tag on loans consistently with its stop advance model, and not with regard to whether or not the loan had been modified. There was no evidence of deceptive or inadequate practices for newly boarded loans or of improper behaviour in imposing lender-placed insurance.

RMBS

Debut green RMBS prepped

Obvion is in the market with what is believed to be the first-ever green RMBS. Dubbed Green Storm 2016, the €279m deal is collateralised by Dutch prime mortgage loans secured by energy-efficient residential houses.

Arranger Rabobank notes that the pool comprises properties with the highest energy-efficiency labels ('A' and 'B') and is further constrained by the construction year of the property (from 2002 and onwards). Loans that are used to improve a property's energy efficiency are also conditionally included in the pool. Overall, the pool contains the top 15% of energy-efficient houses in the Netherlands.

"The deal follows the green bond standards (Low Carbon Housing Standard for Residential Buildings and energy efficiency upgrades in Residential Buildings) and has received a certification from the Climate Bonds Initiative. Moreover, the selection criteria have been verified by Sustainalytics," Rabobank explains.

In comparison to a regular Storm transaction, the credit enhancement (5%) is slightly lower and the share of NHG mortgage loans (51%) is somewhat higher. The transaction is specifically targeted at green investors and could see Obvion expand its investor base.

The class A tranche is expected to have provisional triple-A ratings from Fitch, Moody's and S&P. It is anticipated that classes B through E will be unrated and retained.

The roadshow will commence this Friday and the deal is expected to price in the week of 6 June.

RMBS

Rochester notes sold off

OneSavings Bank (OSB) is selling off its investment interest in the Rochester Financing 1 deal. Morgan Stanley will purchase the C, D and E notes, and will launch an auction for the F notes and residual certificates in the transaction.

The sale must generate at least £95m before there will be consideration of closing the deal, according to OSB. The transaction is expected to generate a pre-tax gain of at least £25m and will see OSB offload £256m in gross assets and an additional £81m in risk weighted assets that are tied to the securitised mortgages.

The Rochester deal was issued back in October 2013, securitising approximately £376m in mortgages that it brought from OSB. The senior A1, A2 and B notes were sold to a third party investor, but OSB purchased the four most junior classes and the certificates.

The gain on OSB's sale will be used in part to support its additional net loan book growth in 2016, which is now expected to be marginally ahead of previous guidance of 20%. The deal with Morgan Stanley is expected to close in June.

RMBS

ACIS innovates again

Freddie Mac has obtained its first Agency Credit Insurance Structure (ACIS) policy that transfers risk on a reference pool of 15-year residential mortgages not linked to Structured Agency Credit Risk (STACR) debt note bonds. The new transaction provides credit loss protection up to a combined maximum limit of approximately US$201m of losses on single-family loans and a portion of credit risk on a US$11.1bn reference pool of single-family loans purchased in the third and fourth quarters of 2015. Previous ACIS policies were tied to a STACR reference pool of 30-year mortgages.

"We are very excited about the strong market reception to this ACIS transaction that represents an expansion of coverage to another mortgage product, as well as our credit risk transfer capabilities," comments Kevin Palmer, svp of single-family credit risk transfer for Freddie Mac. "By adding 15-year mortgages, we further expand our ability to reduce taxpayer risk."

Freddie Mac has placed approximately US$4.5bn in insurance coverage through 17 ACIS transactions since the programme's inception in 2013. The company has grown its investor base to approximately 200 unique investors, including reinsurers.