Contents

CDS

Trigger point

Novo Banco outcome still raising questions

Two controversial credit event determinations earlier this year in connection with the retransfer of Novo Banco bonds left many affected CDS holders aggrieved. Three months on, questions are still being asked about the reliability of such contracts to pay out.

The Portuguese central bank, Banco de Portugal (BoP), precipitated the Novo Banco controversy in August 2014 when it transferred a portion of assets and liabilities from the struggling Banco Espirito Santo (BES) to Novo Banco under the country's bank resolution regime. At the time, the latter institution was considered to be performing strongly, but an ECB stress test only 16 months later revealed a capital shortfall at the bank.

BoP subsequently chose to retransfer five senior bonds totalling €2bn from Novo Banco back to BES (SCI 14 January). The action resulted in market participants petitioning ISDA's EMEA Determinations Committee (DC) about whether a governmental intervention credit event (GICE) had occurred with respect to Novo Banco and whether a succession event would be triggered.

After the DC failed to reach a supermajority on the GICE issue, the decision was referred to a three-judge external review panel, which subsequently ruled that a credit event had not occurred (SCI 17 February). The succession question was resolved a few weeks later, when the DC determined that no succession event occurred under ISDA's 2003 Credit Derivatives Definitions and that there is no successor to the relevant obligations of Novo Banco for the purposes of the 2014 Definitions (SCI 3 March).

A determination in favour of a succession event could have seen half of the outstanding CDS on Novo Banco transferred to BES. This would have led to pay-outs if a failure to pay credit event was subsequently determined, following the expected wind-down of BES. Consequently, the DC's decision disappointed many.

"Inevitably, the varied responses have been shaped by the trade positions of market players," says Assia Damianova, special counsel at Cadwalader, Wickersham & Taft. "For example, the affected bondholders were adamant they weren't treated equitably when compared to unaffected bondholders and have argued that BoP's actions, as resolution authority, were politically motivated."

Specifically, Damianova notes the accusation by bondholders that BoP deliberately selected bonds governed by Portuguese law to avoid challenges that would have likely risen from courts in other jurisdictions, such as in the English courts. The actions of BoP have also raised questions as to whether CDS contracts are working, at least to the investor's desired purpose.

"The result really highlights that under the EU's Bank Resolution and Recovery Directive, resolution authorities like BoP may have much wider powers and tools at their disposal than the ambit of the CDS GICE," adds Damianova. "The DC external review panel did take a narrow view of GICE's 'catch-all' provision, which protection sellers thought was the right interpretation, for the sake of certainty."

The provision looks at whether the actions of the resolution authority had an 'analogous' effect to a mandatory cancellation, conversion or exchange of the assets. A broad interpretation of 'analogous' would have triggered a credit event, but the DC external review panel noted at the time of its ruling that such an approach would have left the clause dominating the definition and criteria for a succession event. This would have stood in opposition to the 'careful and detailed drafting' it is intended to represent, the panel concluded.

"The panel took a relatively narrow view of GICE, probably in an effort to avoid market uncertainty," Damianova adds. "Further, BoP is likely to have considered how to avoid a credit event, for fear of any wider contagion in the market, so its action would have been measure to avoid CDS payments being triggered."

Nonetheless, the uncertainty and confusion that has arisen following these events has called into question the efficacy of CDS contracts. This was underlined when Citi reportedly responded to the ruling by asking its clients if the GICE definitions that govern the contracts needed to be changed to improve creditor protection.

Damianova points out that on the one hand, an improved position would be most welcome by protection buyers, but on the other hand, regulators could still try to intervene in a way that does not trigger CDS and most CDS in the global market are traded without such GICE triggers. She adds that it is next to impossible to draft a trigger that anticipates all governmental interventions, while providing certainty for protection sellers that the scope of their potential liability will not be expanded.

"The events surrounding Novo Banco's resolution may be seen as extraordinary, but they have also shown some of the limits of the GICE trigger - which, perhaps, are not what the market expected," she concludes. "Protection buyers will certainly have to re-evaluate the 'worth' of this trigger, as determinations under GICE are likely to look narrowly at the form of governmental action, not necessarily on the economic results."

JA

Structured Finance

SCI Start the Week - 13 June

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

Pipeline
The total number of deals joining the pipeline remained consistent last week, although ABS accounted for a smaller proportion than it had done previously. There were four new ABS as well as three RMBS, three CMBS and one CDO.

US$500m Chesapeake Funding II Series 2016-2, US$219.85m Foursight Capital Auto Receivables Trust 2016-1, US$111.2m NMEF Funding 2016-A and CNY4bn Rongteng 2016-2 Retail Auto Mortgage Loan Securitization were the ABS. The RMBS were US$161.7m COLT 2016-1, US$412.7m JPMMT 2016-1 and Triton Trust No.2 2016-1.

The CMBS consisted of US$1.28bn FREMF 2016-K55, US$500m LSTAR 2016-4 and US$240m VB-S1 Issuer Series 2016-1. The only CDO was S$600m-equivalent Astrea III.

Pricings
Many deals departed the pipeline. There were 11 ABS prints as well as an ILS, six RMBS, three CMBS and three CLOs.

The ABS were: US$400m California Republic Auto Receivables Trust 2016-2; US$183m CCG Receivables Trust 2016-1; US$1.8bn Chase Issuance Trust 2016-2; US$435m DT Auto Owner Trust 2016-3; US$300m Harley-Davidson Motorcycle Trust 2016-A; US$761m Navient Student Loan Trust 2016-3; €1.242bn Sunrise 2016-1; Sfr200m Swiss Auto Lease 2016-1; US$900m Trillium Credit Card Trust II 2016-1; CNY2.58bn VINZ 2016-1 Retail Auto Loan Securitization Trust; and US$550m Westlake 2016-2.

US$150m Blue Halo Re Series 2016-1 was the ILS. The RMBS were: €708m Arena NHG 2016-1; €500m Green Storm 2016; A$250m La Trobe Financial Capital Markets Trust 2016-1; A$2bn National RMBS Trust Series 2016-1; US$345m Sequoia Mortgage Trust 2016-1; and US$795m STACR Series 2016-DNA3.

US$162m BBSG 2016-MRP, US$337m JPMCC 2016-FL8 and US$133m LMRK Issuer Co Series 2016-1 were the CMBS. The CLOs were US$450m ALM XVIII, €463m Avoca CLO XVI and €363m Cairn CLO VI.

Markets
US ABS technicals remained stable last week and spreads held firm. JPMorgan analysts comment: "Primary market concessions to secondary have diminished in benchmark credit card and auto sectors. However, tiering remains pronounced with liquidity still a concern for discerning investors. Despite improvement in pricing and demand, transactions from off-the-run names and asset classes do require premiums and more effort to successfully execute."

The US CLO secondary market ended on something of a hot streak, as SCI reported last week (SCI 9 June). A triple-A list on Thursday included Tier 1 triple-A paper at around 140bp.

The European CLO market was quieter, but stable. As SCI reported (SCI 9 June), secondary spreads were flat to slightly tighter over the week, but liquidity remains thin.

Editor's picks
Trups trinity: The Trups CDO sector has shown signs of resurgence in recent months. A trio of new deals, improved performance and attractive secondary market opportunities have generated optimism about the asset class...
BTL stampede: Buy-to-let lending in the UK surged in the weeks leading up to the recent stamp duty changes, with implications for RMBS. Lending rose from £3.6bn in February to £7.4bn in March, although the loan approval figures actually fell slightly...
Risky retail: US CLO exposure to retail names has come under closer scrutiny in the last couple of months as store closures and the shift to online shopping weigh on the industry. Against this backdrop, the success of specialty brands is driving differentiation across the sector...
Euro SF risk overestimated?: The amended external ratings based approach (EBRA) for calculating regulatory capital changes in European structured finance transactions has come under scrutiny in a recent report from Scope Ratings. Entitled 'External Rating Based Approach: One-size-fits-all limits banks' lending capacity', the study analyses the 11 European SF transactions rated by the agency and questions whether the EBRA amendments may result in the overestimation of the expected economic risk in certain tranches...
UK BTL portfolio sale planned: UKAR plans to follow last year's £13bn Granite portfolio sale (SCI 15 November 2015) with the offloading of a further £16bn in mortgages, understood to be the pool backing Bradford & Bingley's outstanding Aire Valley master trust securitisation programme. The sale process is expected to start this year...

Deal news
• Caliber Home Loans is in the market with the first post-crisis RMBS backed by newly originated non-prime mortgage loans. Dubbed COLT 2016-1 Mortgage Loan Trust, the US$161.71m transaction is backed by 368 loans with credit scores (701) similar to legacy Alt-A collateral.
• Renovate America has priced the largest PACE ABS to date, a US$305.3m designated green bond. HERO Funding Trust 2016-2 is the seventh deal from Renovate, pushing the programme's total issuance to US$1.35bn.
• Astrea Capital, a subsidiary of Azalea Asset Management, is in the market with a collateralised fund obligation. Astrea III consists of notes backed by the cashflows generated by a pool of 34 private equity funds.
• Amanah Saham Nasional Berhad (ASNB) is prepping the first issuance under its new RM10bn Perpetual Nominal Value MTN Amanah Saham Bumiputera (ASB) securitisation programme. Dubbed Westeros Capital, the deal is the first rated Malaysian ABS involving personal loans secured against ASB investments.
• Navient has extended a further US$1.1bn in FFELP student loan ABS. The amendments include the extension of the legal final maturity dates for the A7 and B tranches of SLM Trust 2003-14 to 2065.

Regulatory update
• The European Parliament's ECON Committee rapporteurs have published their first drafts for resolutions on the proposed new European securitisation regulations. The tone of the documents suggests a preference for a tougher regulatory stance on securitisation.
• The US SEC has adopted trade acknowledgement and verification rules for security based swaps (SBS), requiring related entities to provide full terms of transactions. The move is designed to help promote the efficient and effective operation of the SBS market.
• A UK-based investment adviser and its cio have agreed to settle US SEC charges that they breached their fiduciary duties by operating two private funds in a manner inconsistent with prior disclosures. James Caird Asset Management (JCAM) and Timothy Leslie will pay more than US$2.5m to settle the charges.

Deals added to the SCI New Issuance database last week:
ALM XIX; Arena NHG 2016-I; Arrowpoint CLO 2016-5; Avoca CLO XVI; BA Credit Card Trust 2016-1; BPCE Consumer Loans FCT 2016-5; Colony American Finance 2016-1; Drug Royalty III LP 1 (Series 2016-1); FREMF 2016-K1502; FRESB 2016-SB17; Hertz Vehicle Financing II Series 2016-3; Hertz Vehicle Financing II Series 2016-4; KKR CLO 14; National RMBS Trust 2016-1; OneMain Financial Issuance Trust 2016-3; Sunrise series 2016-1; TCI-Flatiron CLO 2016-1; TIAA CLO I; WFCM 2016-C34

Deals added to the SCI CMBS Loan Events database last week:
BACM 2004-6; BACM 2006-5; CD 2007-CD4; CGCMT 2007-C6; CGCMT 2008-C7; CGCMT 2012-GC8; CSFB 2004-C5; DECO 2006-C3; DECO 7-E2; ECLIP 2006-3; EURO 26; GCCFC 2006-GG7; GCCFC 2007-GG9; JPMCC 2010-C1; LBUBS 2005-C1; LBUBS 2006-C6; MSC 2007-HQ11; MSC 2011-C3; MSC 2015-420; WBCMT 2007-C30; WFCM 2014-LC16; WFCM 2015-C28 & CGCMT 2015-GC29; WFRBS 2014-C20; WFRBS 2014-C25; WINDM X

Structured Finance

Euro ABS prospects polled

In its first annual survey of European structured finance and covered bond market participants, DBRS finds that 79% of portfolio managers intend to increase their securitisation investment - 64% by 'a little' and 14% by 'a lot'. Just under half (43%) of respondents cite 'lack of supply' as a reason why they are restricted from purchasing more, with 'regulation' the second-most cited reason.

Not all investors plan to increase their investment in securitisations, with 6% intending to decrease their investment 'a lot' and 19% indicating no intention to change. However, market participants appear bullish on the prospect of new investors entering the market.

When asked whether there would be more or fewer investors in the market in the next 12 months, 33% said there would be more investors in the market. The majority (45%) indicated that there would be no change, but 13% said there would be fewer and 8% said there would be a lot fewer.

Securitisation participants expect €75bn in distributed issuance and €195bn of issuance in total this year. In total, 69% of those polled predict less than €80bn and 84% believe that distributed issuance will be less than €100bn. In terms of total issuance, with 63% expected less than €200bn and 79% predicted less than €225bn.

In terms of where supply is expected to come from in the next 12 months, the majority of those polled believe that RMBS and auto ABS will be major areas of expansion. However, alternative ABS - such as NPLs and marketplace lending - and SME CLOs are also highlighted, particularly from Italy. In RMBS, the UK, the Netherlands and Italy are expected to be areas of future issuance. CMBS does not register in the top 10.

The survey results emphasise that the largest impediment to the development of the securitisation market is considered to be regulation, with 'all regulations' receiving the highest number of votes and the highest average priority rank. Of the regulations that are most important to change in order to support the growth of the market, Solvency 2 and the liquidity coverage ratio (LCR) are considered high priority items to adjust.

Next is simple, transparent and standardised (STS), which received more votes than LCR but was not given as high a rank in priority. Participants also prioritised ECB actions via repo, ABSPP and quantitative easing, as well as the need to adjust the activities of the ECB.

Separating survey participants into issuers and investors, STS is viewed as the most important, ranking top by investors and second by issuers. Issuers ranked ECB repo as most important to change, while investors did not. Solvency 2 and LCR both rank highly for investors and issuers, while MiFID 2 and AIFMD rank lowly.

Meanwhile, participants were asked about the UK referendum, with two-thirds expecting the country to remain in Europe. However, should the UK opt to exit the EU, the impact on the market is expected to be a widening of spreads (65%). The next most popular choice was for no real impact on the market (18%), followed by 'a total market disaster' (11%).

CS

Structured Finance

Going green

Evolution of renewables ABS discussed

Representatives from Renovate America, Kramer Levin and T-Rex recently discussed the development of the renewables ABS market during a live webinar hosted by SCI (view the webinar here). Focusing on the PACE and solar sectors, this Q&A article highlights the main talking points from the session, including structuring and performance considerations. For a broader and more in-depth exploration of these themes, download a special SCI/Renovate America research report on green securitisation.

Q: How has the renewables ABS sector evolved?
Craig Braun, md, capital markets at Renovate America: Beginning with the PACE sector, Renovate America was able to complete the first securitisation in the space in 2014 in a transaction of just over US$100m. We followed this issuance up with six further deals since then and plan to be an active issuer in the ABS space for years to come. In total, we've completed over US$1bn of green bonds that meet the Green Bond Principles of 2015.

PACE is a common form of financing that can be paid back via a voluntary assessment on an annual property tax bill. It has a lien priority that is equal to all other taxes and assessments, which makes it a low-risk asset class from an investor and rating agency perspective.

PACE is a public-private partnership, whereby a PACE provider teams up with a municipal issuer, such as the County of Los Angeles. The municipality uses its bonding ability to issue limited obligation improvement bonds that are backed by the various assessments put in place by PACE providers.

Homeowners can apply for PACE financing to upgrade their HVAC systems, or install solar panels or water conserving measures. There are 55 different product categories that qualify for PACE financing and over a million products within those categories, but the improvements must be energy-efficient, renewable energy-generating or water conserving. For instance, the Californian regime heavily promotes water conservation and even includes seismic protection, while Florida provides for wind protection.

PACE empowers homeowners to make the right choice and the smart choice by providing them with a tool to pursue these improvements with no money out of pocket.

California is by the far the most active state out of the 32 states plus Washington, DC that have implemented PACE legislation. In terms of total PACE volume, around US$1.5bn has been originated so far. HERO, our platform, is available throughout California and will soon be available in Missouri and Florida.

Benjamin Cohen, ceo of T-Rex: The other main renewables ABS asset is solar, which can be purchased via PACE, as well as through power purchase agreements, loans and leases. There has been a 65% compound growth rate in residential and commercial solar panel installments in the US over the last decade, facilitated by improved technology. Technology has enabled the cost of solar power to drop from US$40 per watt four years ago to 60 cents per watt today.

SolarCity and Sunrun have been at the forefront of the development of solar ABS. We have seen seven solar ABS issued to date - six by SolarCity and one by Sunrun. The majority of these deals securitise power purchase agreements and over time the deals have increased in size and in yield as investors become more comfortable with the asset class.

One issue you find with solar and not with PACE is tax equity. Tax equity is derived from the investment tax credit, which typically provides 30% of the capital stack and is incredibly complex - but not impossible - to structure around in a securitisation.

Q: In terms of structuring, what are the differences between PACE bonds and regular ABS?
CB: The main difference is that the underlying asset is a tax lien and those are bundled up into limited obligation improvement bonds, which serve as the collateral for the securitisation. The interesting aspect of the PACE assessment is that, like most taxes, the only money that's due is the annual or semi-annual tax payment.

If there is a default or a foreclosure, the principal balance does not accelerate. This is a unique feature of the asset class, which isn't widely appreciated. The only thing that is at-risk during a foreclosure is the tax payment due during that period.

If a homeowner doesn't pay their taxes, they're subject to a penalty - which in California is 10% of the tax due - and after a certain number of months interest begins accruing at 1.5% a month. In the event of delinquencies, there's actually more cashflow available to a PACE deal than if the property owners default on their mortgage payment.

That being said, PACE delinquencies are very low - people tend to pay their taxes, and people with PACE assessments tend to perform better than the average tax payer because they're somewhat of a self-selecting pool. These are people that are investing in their homes and seeking to reduce the cost of ownership.

Finally, the servicer on PACE deals - certainly in the case of the Californian regime - is the county in which the assessment is being levied. Typically in securitisations, the servicer is an affiliate of the originator or the B-piece buyer. So, in the case of the HERO platform, 28 different servicers are billing and collecting the taxes.

Laurence Pettit, partner at Kramer Levin: Both the solar and PACE asset classes have initially struggled with educating investors as to how servicing works. In the ABS world, we're used to the servicing process being done in a certain way, but in both solar and PACE there are unique aspects to servicing.

In solar, as there is some ongoing maintenance involved on the solar installations and because historically there weren't many companies involved in the sector, the idea of there being a back-up servicer was challenging. In PACE, the challenge is parsing out the different servicing roles: as well as the counties which handle billing and collecting, other servicing duties are performed by the trustee, while the municipality is responsible for foreclosures.

Other than that, the structuring differences are fundamental because PACE is a tax and thus has a benefit from the lien perspective and is secured by the entire property, which is not the case with rooftop solar ABS. In terms of cashflows, you can look to tax lien ABS for comparable payment history and you can access data from counties on how often people are delinquent on their real estate taxes. In the case of California, where limited obligation improvement bonds have been popular for years for other purposes, there is also an indicative history of how those bonds have performed.

Rooftop solar is novel in many respects. We know how diligently people pay utility bills, but the extent to which you can apply that payment history to rooftop solar was open to question from rating agencies and investors. But over time a consensus has formed on how that should be analysed and, as more deals are done, we're starting to develop our own payment history for the bonds - which will provide a significant benefit as the years go by. 

Q: California accounts for the majority of PACE assessments currently in place. What are the challenges of expanding the PACE programme into other states?
LP: The initial challenge is something that none of us in the ABS world are very familiar with and it involves state-level politics: each state has its own priorities and legislative issues to deal with. That being said, there is a huge take-up nationwide of PACE legislation - so, despite having to navigate each statehouse separately, PACE is gaining traction because it is popular with both elected officials and consumers.

It resonates with elected officials because the Californian experience has shown PACE to have a tremendous economic stimulus, and it's popular with consumers who embrace new ways to finance home improvements. Seeing as consumers vote for elected officials, PACE creates a virtuous circle.

The most significant attraction is that PACE has a measurable impact on the use of renewable energy and on energy savings. In addition, although it provides a public benefit, it doesn't cost the public sector any money because whoever is hired as the programme administrator (such as Renovate America) will be responsible for ensuring that funding is in place for the improvements installed using PACE.

The programme administrator also has to find an investor to buy the individual assessments or the improvement bonds that are backed by the assessments. There is no period of time during the origination process where the sponsoring municipality has to use its own funds to pay for any of the programme costs.

Renovate America and others have proven that PACE assessments are an interesting asset for ABS investors, but they derive from municipal finance and marrying some legal and contractual concepts from muni finance with the expectations of ABS investors can be a challenge. Therefore it is important to be involved early and scrutinise the contracts and agreements, and the underlying muni bond indentures to ensure they comply with the expectations of an ABS investor and that they provide for contracted cashflows to be paid from the consumer all the way to the ABS investor.

There are always wrinkles in each state that need to be addressed or at least understood before a programme is launched to ensure there's an efficient means for collecting the tax. Clearly California is a good example.

There also needs to be a clear legal framework that tells you as an ABS investor at what point someone has the right to enforce on a delinquent property owner and that there is someone monitoring the process, who will enforce the remedies where necessary.

Q: Why is the scalability of PACE platforms an advantage?
CB: Once you get beyond the political and legislative challenges, with a tech-enabled platform, the PACE business is highly scalable. We estimate that the opportunity for PACE in the US is an annual market of US$159bn in home improvements, which either reduce energy or water consumption, or generate renewable energy.

California represents about US$22bn of this opportunity and so far we've just scratched the surface in the state. If you translate this across other states, there is a huge opportunity - especially considering residential properties account for 20% of US energy consumption and, of that, HVAC systems represent 40%.

However, there are a number of barriers to entry. Each programme administrator has to work in each state and get the issuers lined up and then get each community to the stage where consumers can opt into a PACE programme. It's a lot of hammer-and-chisel work upfront, but once the infrastructure and the contractor (point of sale) network is in place, the platform can easily be scaled up.

Q: How do commercial PACE financings differ from residential PACE financings? Can we expect any term securitisations in the commercial space?
LP: Residential and commercial programmes are almost exactly the same, except that the improvements/projects are larger in the commercial sector and can be more complicated. They tend to require accommodation or negotiation with the property owner/commercial mortgagee and that makes the origination process more time-consuming.

It is just a question of time before commercial PACE programme administrators can put together portfolios that are suitable for securitisation. It is taking time for commercial property owners to realise the benefits of participating in commercial PACE programmes.

Unlike residential consumers, commercial property owners have multiple options available to them and are more cautious on adopting PACE. But the popularity of commercial PACE is growing and there are no structural or legal reasons why there can't be term securitisations of commercial PACE - it's more about accumulating an appropriate pool.

Q: In terms of refinancings, do lenders typically require PACE obligations to be repaid prior to the new funding?
CB: Yes they do. The options for a homeowner are either to pay their PACE obligation off, have it transferred to the new property or apply for a limited subordinate PACE product, which we call PACE 2.0. Any time there is a problem with a homeowner in terms of a refi, we have a dedicated group of property advisors that work with realtors and mortgage brokers to facilitate the sale or transfer.

Q: How should investors evaluate risks in solar and PACE securitisations?
BC: There are a handful of risks to be aware of: the typical prepayment and refinancing risk; if there is a default, what is the lag before payment; and what recoveries can be expected. A lesser risk is creditworthiness. Investors have to figure out the likelihood of these risks occurring across an entire portfolio under various scenarios.

The risks become more complex for solar ABS, but also more transparent. An additional risk for solar is how many hours of energy will be produced by the installation. It is necessary to evaluate the characteristics of the solar panel itself, as well as the purchase/lease/loan agreement.

It also important to look at forward power market conditions - especially when evaluating residual positions - because many contracts are for 20 years, yet the life of the panel will likely last for 40 years. Understanding these risks is critical for liquidity and access to capital.

Q: In general, how have PACE securitisations performed?
CB: Renovate America has only issued six deals and two of our competitors have done a deal each, but they were pure private placements and so there's limited information publicly available. With respect to our transactions, delinquencies tend to rise just after the tax payment is due - because sometimes people forget to pay or they have other issues - and then trend downwards.

For the HERO Funding Trust 2014-1 and 2014-2 deals, delinquencies for the 2014-2015 fiscal tax year are averaging just under 40bp. On the 2015-1 and 2015-2 deals, for the 2015-2016 fiscal tax year, delinquencies are a little over 2%. Overall Californian tax delinquencies are on average double that figure, so the transactions are showing very good performance.

Q: Have solar securitisations performed as well as expected?
BC: Solar securitisations have performed better than expected across a few different metrics, including the default rate applied by rating agencies. While more solar securitisations have been issued than PACE securitisations, the total volume of securitised solar assets is lower and so the sector also has limited data points.

Without adequate tools and confidence in the numbers, rating agencies have taken conservative assumptions towards solar. But all the data that has come in over the brief 2.5 years since the first deal in the space shows that default rates are incredibly low - a fraction of what the rating agencies expected them to be - and all the note ratings have been affirmed thus far.

Another good indication of the performance of solar ABS deals is how the securities trade in the secondary market. A great example is SolarCity's first securitisation: it was rated triple-B plus, with a seven-year WAL, and priced in November 2013 at a spread of swaps plus 265bp. Eight months later, its third deal priced at plus 180bp, with a higher advance rate but the same rating and WAL.

A secondary trade of the first deal was subsequently executed at similar levels. Such spread compression reflects the fact that investors are becoming more comfortable with the asset class and the collateral is becoming more seasoned.

Q: Looking ahead, how is the recent extension of the investment tax credit (ITC) likely to impact the solar sector?
LP: The ITC was extended in December 2015 as a 30% credit for residential and commercial solar projects until end-2019, after which the credit drops year by year. The decreases are to 26% in 2020, 22% in 2021 and then permanently to 10% for commercial solar and zero for residential solar. The Solar Energy Industries Association projects that the extension of the credit will result in 50%-55% additional installation capacity, compared to what would have been expected without the extension.

The association is projecting the installation of 98 gigawatts of solar power by end-2020, which is enough to power over 20 million homes. This is, of course, good news for the solar ABS market and indirectly for PACE providers as well.

Q: What are the prospects for tapping the European investor base?
CB: We view the prospects as bright: we're hoping to attract European investors to the US PACE ABS deals we're issuing. We're aiming to provide additional supply this year and recently had our first four HERO deals verified as being in alignment with the Green Bond Principles. This means that the HERO programme is the first ABS platform to issue solely green bonds and the first entirely green bond platform in the world.

PACE aligns nicely with green bond principles because the energy savings/impact is known upfront. We recognise that the European investor base has certain pockets of money that are dedicated to green investment. We plan to take the HERO programme on the road to Europe and meet with investors at the Global ABS conference in Barcelona.

We're unfamiliar with the legislative landscape in Europe, although PACE can work anywhere - it's a matter of having the enabling legislation in place.

Q: Will PACE cannibalise current renewable energy type-deals?
BC: It can and it has. Because PACE is such a straightforward structure and is very easy for investors to understand, you see Renovate America as a market leader originating tremendous volume in a short space of time. Other renewables finance companies have typically struggled to replicate the efficiencies of PACE and so there is significant opportunity to grow its market share, both in the US and - with appropriate legislation - beyond.

Structured Finance

Demica beefs up

Demica has added three key new roles to its team in London, with the aim of developing both its origination, structuring and transaction management services and its proprietary technology platform. Mansour Davarian joins the firm as associate director of origination, Markus Musielak joins as a director of structuring and Luke Thompstone joins as senior infrastructure engineer.

Davarian was previously European business development manager at Hitatchi Capital, with responsibility for developing group financing strategies. Before that, he spent seven years at HSBC in a variety of roles, including securitising consumer, auto, trade and mortgage-backed receivables on a non-recourse basis. At Demica, he will report to Tim Davies, head of origination (Europe).

Musielak was previously a consultant at Northern Trust, where he was responsible for executing legal deliverables for the firm's T2S strategy. Prior to that, he was a consultant at Citi and BNP Paribas, and an executive director for corporate and structured finance products at WestLB. He will report to Francois Terrade, head of structuring (Europe) at Demica.

Thompstone was previously an IT manager and consultant at CoreAzure. He also spent 12 years at PLR Consultants as systems administrator and consultant. He will report to Lear Specketer, Demica's IT manager.

Demica has also made further hires to its development and operations teams, including Dario Avella as a developer, Gloria Orera as a consultant and Aoife Doherty as junior office manager.

Structured Finance

Veteran London trader tapped

Imperial Capital Group has hired Jonathan Noonan as svp and a senior trader focusing on CMBS, pubs and esoteric ABS. He will join the structured products trading group in the firm's London office. Noonan joins from Bank of America Merrill Lynch, where he most recently was a director and ABS trader.

Structured Finance

ABS team strengthened

TwentyFour Asset Management has recruited John Lawler to its ABS portfolio management team. Lawler will officially join the firm in August. He previously held senior roles at RBS, Barclays and Nomura.

Structured Finance

Trading trio recruited

CastleOak Securities has bolstered its leveraged finance sales and trading capabilities by hiring Michael Miller, Thomas Takacs and Richard Wright. All mds, the trio is charged with growing the firm's leveraged finance fixed income sales and trading team.

Most recently, Miller served as head of trading at Macquarie Capital from 2012 to 2015. He previously held leveraged finance roles at a variety of firms, including Nomura, Oppenheimer, UBS, Morgan Stanley and Bear Stearns.

From 2012 to 2015, Takacs served as a partner, coo and director of business development at long/short credit hedge fund Taurasi Capital. He previously held leadership roles at Battleground Capital Management and Ore Hill Partners. Before that, he spent 10 years at Goldman Sachs, where he served as co-head of leveraged finance and distressed sales.

Wright most recently as an md at Jefferies for more than seven years in the leveraged credit sales group, focusing on leveraged finance debt placement, special situations and distressed debt. He was previously at Bear Stearns for 13 years as a senior md, primarily working in the distressed fixed income sales specialist group.

In addition to its leveraged finance hires, CastleOak has added veteran fixed income generalists Brian Lynch, Fred Stuart and Thomas Warnock to its investment grade and money market generalist teams.

Structured Finance

Hatteras tender extended

Annaly Capital Management has extended its previously announced exchange offer to purchase all of the outstanding shares of common stock of Hatteras Financial Corp (SCI 11 April). Under the offer, Hatteras common stockholders may elect to receive, in exchange for each share of Hatteras common stock they hold: US$5.55 in cash and 0.9894 shares of Annaly common stock; US$15.85 in cash; or 1.5226 shares of Annaly common stock. Hatteras common stockholders tendering into the offer and making an all-cash election or an all-stock election will be subject to proration, so that approximately 65% of the aggregate consideration in the offer will be paid in shares of Annaly common stock and 35% of the aggregate consideration in the offer will be paid in cash.

The offer will now expire on 11 July. It has been extended to allow the parties to obtain the remaining regulatory approvals.

As of 14 June, approximately 7,111,887 shares of common stock of Hatteras have been validly tendered and not properly withdrawn pursuant to the offer, representing approximately 7.5% of the outstanding shares of common stock of Hatteras.

Structured Finance

SME lender names chief

British Business Bank Investments has appointed Catherine Lewis La Torre as ceo, effective from 1 September. She joins from Cardano, where she is head of private equity and responsible for managing a portfolio of private capital fund investments with over £1bn of client commitments. The appointment follows the announcement that Peter Wilson was stepping down as ceo in March.

Lewis La Torre has over 30 years' experience in the private equity industry, focused on investing in the European mid-market. Before joining Cardano, she was co-founder of Proventure Private Equity and later established her own private capital consulting business.

British Business Bank Investments has also named two new non-executive directors - Sara Halbard and Francis Small. Halbard is the former head of credit fund management at Intermediate Capital Group and Small is a former senior partner at Ernst & Young. Pat Butler stood down as a non-executive director at the end of May.

Structured Finance

Director duo appointed

New York Mortgage Trust has appointed Kevin Donlon and Michael Clement as directors, with the latter also serving as a member of the board's audit, compensation and nominating and corporate governance committees. Donlon was named president of the REIT last month, following its acquisition of RiverBanc, which he founded in 2010.

Donlon was previously an md with BlackRock, following its acquisition of Helix Financial Group in January 2010, which he founded in May 2004. Prior to that, he was a principal in the CMBS capital markets group of Banc of America Securities.

Clement has been a professor in the Department of Accounting at the University of Texas at Austin since 2011 and has held associate professor and assistant professor positions in the department since 1997. He was a vp of global investment research for Goldman Sachs from 2002 until 2004, and before that was a vp of capital planning and analysis from 1988-1991 and a manager of the audit division from 1982-1986 at Citi.

CMBS

Origination probe underway

CBL & Associates Properties has disclosed that the US SEC is conducting an investigation into four specific non-recourse secured loans that the firm originated in 2011 and 2012. Specifically, the purpose of the review is to ensure that the information provided to lenders regarding lease status reports, revenues and expected revenues did not materially vary from the firm's financial statements.

CBL says that for the last two weeks it has used "every available resource" to determine whether there is an investigation by a governmental agency underway with respect to its loan procedures. The move followed certain allegations made in media coverage.

The firm says the SEC welcomed its proactive outreach, as well as its commitment to commission an independent review of procedures with respect to the loans. Ernst & Young has been engaged to conduct the investigation and the findings will be provided to the SEC. CBL is confident that this will bring a positive resolution to the matter.

CMBS

Special servicing head appointed

Torchlight Investors has reshuffled its special servicing group by appointing Abbey Kosakowski to lead its operations. Kosakowski is already svp for the firm and has previously held senior roles at JPMorgan and Lehman Brothers.

She takes over the role after Torchlight md and investment committee member, Steven Schwartz, exited it. Schwartz will continue to lead Torchlight's acquisitions group and will also help contribute to the firm's launching of a new CMBS-focused fund.

CMBS

Lender taps CRE arranger

Walker & Dunlop has boosted its capital markets team with the hire of Stuart Wernick as svp and md. He will be responsible for building the firm's regional production platform in its Dallas office by arranging CRE loans to banks, life insurance companies, CMBS conduits and others.

Prior to joining, Wernick served as senior md at Berkadia Commercial Mortgage, where he led its loan origination team in debt and equity placement through a wide variety of transaction types. He is also the founder and president of Quantum First Capital, a real estate finance and advisory firm.

CMBS

CRE lending teams bolstered

Greystone has boosted its origination team with the additions of Don Farmer and Lou Tiberio. They will be located in Dallas and Philadelphia respectively, and have joined as part of the company's push to boost its regional mortgage lending production.

Prior to joining Greystone, Farmer was most recently md of structured finance at Transwestern. He also served roles as south central regional loan origination manager at Bridger Commercial Funding and was a co-founder of Arcap REIT.

Tiberio joins from Investors Bank, where he was vp. His focus is on agency lending production in the Philadelphia and southern New Jersey markets. His presence expands Greystone's regional reach for Fannie Mae and Freddie Mac multifamily financing.

Insurance-linked securities

ILS fund administrator acquired

Horseshoe Group has acquired IKONIC Fund Services, expanding its service offering to include fund administration. Horseshoe and IKONIC have partnered since 2011 through the joint venture fund administrator, ILS Fund Services.

IKONIC will be rebranded as Horseshoe Fund Services as part of the deal, which builds on Horseshoe's status as the largest independent insurance manager to the ILS market. Post-acquisition, Horseshoe will have more than US$20bn in AUM.

The transaction closed last week and is subject to the customary regulatory approvals.

Risk Management

Collateral platform acquired

Broadridge Financial Solutions has expanded its global securities financing and collateral management capabilities through the acquisition of 4sight Financial Software. The firm says that 4sight's solutions and global client footprint complements its North American presence in the securities financing market.

Through this acquisition, Broadridge now offers global solutions that include front-to-back office securities lending, repo processing, synthetic financing and enterprise-wide collateral management. Terms of the deal were not disclosed.

Quayle Munro acted as 4sight's financial advisor in the transaction.

ABS

Further SLABS extended

Navient has amended the transaction agreement for SLM Trust 2013-2, in order to extend the legal final maturity date of the US$800m senior tranche to 2043. Since December 2015, Navient has extended the legal final maturity dates on US$6.8bn of bonds from its FFELP student loan ABS.

ABS

More SLABS reviewed on FFELP update

Moody's has taken rating actions on 403 tranches of FFELP student loan ABS and ABS backed by mixed pools of student loans (both FFELP and private), affecting approximately US$84.3bn of securities. The move follows the agency's initial assessment of the securities under its updated FFELP student loan ABS methodology, which it published yesterday (14 June).

Moody's placed 266 tranches in 141 transactions (totalling US$44.9bn) on review for downgrade, 89 tranches in 59 transactions (US$3.1bn) on review for upgrade and 45 tranches in 34 transactions (US$2.8bn) on review with direction uncertain. The agency also confirmed the ratings on three tranches (US$1.5bn).

In addition, 101 tranches (US$30.7bn) previously placed on review for downgrade remain on review for downgrade and four tranches (US$1.4bn) previously placed on review for upgrade will remain on review for upgrade. The agency expects to conclude its review of the affected ratings within six months.

Moody's says its updated methodology for rating FFELP student loan ABS incorporates analysis of a large body of data on the historical performance of FFELP student loan portfolios and follows the review of an extensive set of comments in response to its request for comment on the proposed changes to its approach (SCI 10 July 2015). The quantitative analysis of FFELP ABS in the new methodology is based primarily on an expected loss approach, which mainly depends on scenario-based cashflows and the probability assigned to each of those scenarios.

The expected loss for each security is the sum of the losses, weighted by the probability of each scenario. Moody's obtains the model output by comparing the security's expected loss with the expected loss benchmarks for a security's weighted average life from its idealised loss tables. These expected loss benchmarks vary with a security's WAL.

The methodology also incorporates revised cashflow modelling assumptions for key credit drivers of FFELP ABS. Based on an analysis of performance data - including aggregate transaction performance data and loan-level data for consolidation and non-consolidation loan pools - the agency adjusted its deferment and forbearance usage rate assumptions and added new assumptions regarding borrower usage of the income-based repayment (IBR) plan.

It also revised its assumptions for voluntary prepayments and added new prepayment assumptions that account for government reimbursements of principal and accrued interest on a loan if a FFELP borrower dies or becomes disabled. The new prepayment assumptions account for potential loan forgiveness for borrowers that enrol in IBR.

In addition, Moody's changed its approach to modelling loan defaults to a single constant rate of default during the entire life of the transaction, from a cumulative percentage of defaults and a seven- to 10-year default timing curve that determined defaults in each period.

The agency says it received 33 comments in response to the RFC, of which 28 respondents requested confidentiality.

Separately, Moody's is requesting comments on a new approach to rating student loan ABS backed by mixed pools, comprising FFELP and private collateral. The proposal combines the methodologies it uses to rate FFELP and private student loan ABS.

The agency's approach to rating FFELP ABS includes the calculation of the expected loss of a security under 28 different scenarios, while its approach to rating private student loan ABS includes cashflow modelling using cashflow scenarios specific to each rating level. Moody's says it would use the new approach to rating transactions backed by mixed pools of loans in conjunction with the methodologies it uses to rate FFELP and private student loan securitisations.

Recognising the different characteristics of FFELP and private student loans, the agency is proposing to analyse mixed pool transactions as though they were two separate ABS, one backed only by FFELP loans and the other only by private student loans. It would model cross-collateralisation by depositing any residual cash from one ABS to the other.

Then the model output for each of the ABS would be translated to a weighted average pool factor (WARF) and the weighted average WARF would be calculated for the mixed pool ABS based on the proportion of FFELP loans and private student loans in the collateral pool. Finally, Moody's would translate the weighted average WARF for each class of securities to a model-implied output.

If adopted, the agency expects the proposal to result in limited rating actions. It plans to finalise the ratings of the tranches currently on review - and potentially the ratings of other tranches not currently on review - after finalising changes to the methodology.

Comments on the RFC are requested by 15 July.

ABS

Tobacco ABS pay-downs rise

US cigarette consumption rose for the first time in nine years in 2015, interrupting a long-term trend of declining smoking. Moody's says that tobacco settlement ABS are consequently receiving larger payments from tobacco manufacturers in 2016 than they did last year.

Cigarette shipments - a proxy for consumption - have fallen by an average of 3%-4% per year since the inception of the 1998 Master Settlement Agreement between participating tobacco manufacturers and most US states and territories. But last year shipments increased by 1.9%.

"In 2015, we saw an at least temporary halt in the trend towards lower cigarette consumption in the US," says Moody's vp-senior analyst Peter McNally. "As a result, tobacco settlement ABS are receiving larger payments from cigarette makers this year, helping transactions pay down more quickly."

Factors that encouraged increased cigarette consumption last year included low gasoline prices, which gave smokers more disposable income, McNally suggests. Against a scenario in which consumption had again fallen by 4%, the 1.9% rise in consumption last year boosted total payments to states and territories that participate in the Master Settlement Agreement by nearly US$400m.

If the factors that encouraged increased consumption in 2015 persist this year, they could help boost tobacco settlement payments in 2017 as well, Moody's says. As yet, however, a clear trend for cigarette consumption in 2016 has yet to emerge.

ABS

Streamlined extension service offered

Nelnet has launched a new online forum designed to facilitate effective communication with and among investors in FFELP student loan ABS. Free for investors, the service is powered by DealVector and allows them to receive bond-specific notifications and documentation from Nelnet more rapidly than through traditional channels. Investors can also communicate with Nelnet and other bondholders through DealVector's secure messaging platform.

Among the first uses of the new service will be the ability to streamline maturity extensions for six Nelnet transactions - NSLT 2014-4, 2014-5, 2014-6, 2015-1, 2015-2 and 2015-3. The service will then drive prioritisation of subsequent trusts to amend.

Extending a maturity date requires consent from 100% of investors. The new InvestorLink forum allows Nelnet to prioritise extension efforts on trusts where investor demand is greatest and participation highest.

Greer McCurley, Nelnet's executive director of capital markets, comments: "It is a perfect extension of Nelnet core value to communicate openly and honestly, and we believe it will lead to a more efficient and more liquid ABS market. Ultimately, improved communication benefits us, our investors and the market as a whole."

Investors are encouraged to register anonymously at DealVector.com/Nelnet. McCurley continues: "Registering allows investors to ask questions and provide input. More importantly, once we have 100% participation in a given trust, we know we can begin the amendment process."

A tension exists between investors' desire for greater information transparency and their need for confidentiality with respect to their portfolio composition, according to DealVector ceo Mike Manning. "Our service accommodates both by serving as a confidential 'electronic intermediary'. In addition, if an issue requiring a vote arises - as is the case here - investors will be able to complete and e-sign their ballots online. This simplifies the voting process and improves response."

Structured Finance

MBIA Corp liquidity warning

S&P has lowered its financial strength rating on MBIA Insurance Corp to triple-C from single-B, with a negative outlook. The move is due to the insurer's weak liquidity positon and, absent favourable developments, the expectation that it is unlikely to meet all of its insurance policy obligations in the next 12 months.

Specifically, the insured notes issued by the Zohar II 2005-1 CDO will mature on 20 January 2017 and likely result in MBIA Corp paying an immediate claim in excess of US$700m. Management's plan to meet the insurer's near-term liquidity needs includes various actions, none of which on its own would be sufficient to meet the potential claim payment on Zohar II, according to S&P.

If management is successful in meeting the Zohar II payment, the insurer's liquidity is expected to remain weak. Its liquidity position is subject to risks from payment timing on credit default swap contracts, second-lien RMBS excess spread recoveries and timing of backlog payment demands, as well as asset put-back success and recovery timing.

S&P says it views MBIA Corp as a non-strategically important subsidiary of MBIA Inc and, as such, does not expect MBIA Inc or National to provide liquidity support to MBIA Corp. The agency may lower its ratings further if it becomes a virtual certainty that the insurer will not be able to meet insurance policy obligations.

Structured Finance

Green Bond Principles updated

A 2016 edition of the Green Bond Principles (GBP) has been released, creating an online resource for voluntary issuer information on green bond alignment and introducing guidance for issuers of social bonds. The latest edition benefits from the input of GBP members and observers, and takes into account recent market developments.

While the 2016 update continues to be framed by the same four core components - use of proceeds, process for project evaluation and selection, management of proceeds and reporting - a particular effort has been made to recommend best practice on reporting and external reviews, including the use of templates designed to be made available publicly to the market through a GBP Resource Centre hosted by ICMA. It is expected that this will add significantly to market transparency and clarify further the process of green bond issuer alignment with the GBP.

The update contains new definitions and guidance for the type of external reviews that issuers are recommended to use to demonstrate their environmental project selection processes and their adherence to GBP recommendations. Further additions and details have also been included on green categories to help issuers and investors identify eligible green projects.

Additionally, reporting recommendations have generally been strengthened and include important clarifications for issuers on ongoing expectations and point to resources for impact reporting. Reference is made to the wider universe of environmental and climate themed bonds, including those from 'pure play' green companies, to distinguish them from green bonds while also suggesting the adoption of GBP best practice where possible.

Finally, the update acknowledges the application of the 'use of proceeds' bond concept to themes beyond the environment, such as bonds financing projects with social objectives, or with a combination of social and environmental objectives. Guidance for issuers of social bonds has therefore been developed in conformity with the core components of the GBP, providing voluntary guidelines facilitating transparency and disclosure in this emerging segment.

The green bond market has grown substantially in recent years, with issuance to date in 2016 standing at over US$28bn.

Structured Finance

Muted sentiment revealed

Delegates at this year's IMN Global ABS conference were more pessimistic about publicly-placed European structured finance issuance volumes compared to last year, according to a survey undertaken by Fitch. Of those polled, 34% expected 2016 issuance volumes to beat last year's levels, significantly down from the 59% who predicted a year-on-year rise in 2015.

Overall, 34% of respondents expected a fall in issuance this year over 2015's €96bn, while 32% felt 2016 volumes would be in line with those seen in 2015. Of the 34% who expected a rise, just 7% thought it would be by 25% or more, while 27% thought it would rise between 10% and 25%.

Similar to last year's survey results, regulatory uncertainty continues to be seen as the biggest influence on issuance expectations, accounting for 51% of the votes, compared to 60% last year. This was followed by 44% for Brexit uncertainty, with just 3% pointing to the improving economic climate and 2% choosing the emergence of new asset classes - such as marketplace lending - as more positive factors.

Marjan van der Weijden, Fitch's EMEA head of structured finance, comments: "Issuance expectations are a good barometer for overall confidence levels towards the European structured finance market. Our survey results show sentiment is more muted this year, with regulatory uncertainty remaining the biggest driving factor."

She adds: "Regulatory measures, such as the ECB's ABS purchase programme and the EC's STS securitisation proposals, have the ability to provide investors with greater confidence. We continue to believe that confidence would be improved by other regulatory measures; specifically, a reduction of capital charges that securitisation investments attract for banks and other institutional investors."

This year, RMBS replaced consumer ABS as the segment in which respondents expected the most active issuance. Of those polled, 40% voted for RMBS (versus less than 20% last year), followed by 27% for consumer ABS (37%).

The segment expected to see the least issuance was once again CMBS, with 5% of votes (12%). Structured credit received 15% of the votes (31%), while 13% expected no growth in any sector.

Fitch's survey was conducted between 14-16 June and is based on responses from 95 investors, bankers, issuers and other related market participants that attended Global ABS in Barcelona.

Structured Finance

Distressed opportunity fund closes

Crestline Investors has made an additional closing of its Crestline Opportunity Fund III, bringing its capital to US$720m. The fund invests primarily in SME corporate and ABS opportunities, with a focus in North America and Europe.

The ninth in Crestline's series of opportunistic funds seeks to take advantage of dislocations in the two continents' primary and secondary markets. The fund provides sub-US$50m capital solutions in the form of direct lending, distressed credit and structured finance. Specifically, it looks at under-served or capital constrained asset classes, which include SMEs, out-of-favour sectors, companies in transition and stressed or special situations.

Crestline says it is on track to close over US$250m in investment commitments for its strategies in 1Q16.  

Structured Finance

Ares closes direct lending fund

Ares Management has closed its third European direct lending fund after raising €2.5bn. Ares III was oversubscribed from the initial €2bn target set out by the asset manager, a year after its original launch.

Co-heads of the Ares European direct lending platform, Michael Dennis and Blair Jacobson, say that the fund will continue the firm's push into the European mid-market space. Ares will proceed with looking at senior and mezzanine debt, as well as investment opportunities in unitranches.

Ares III has made 15 investments since its launch, contributing to the over 110 direct lending investments now made by Ares. The fund is part of Ares' credit group, which now manages approximately US$60bn in global AUM. ACE III's predecessor fund, Ares Capital Europe II, held its final close in August 2013 at €911m.

CDO

Trups CDO cures slow

Defaulted and deferring US Trups CDO exposures increased in Q1 for the first time since the beginning of 2012, according to Moody's. The agency reports that new defaults and deferrals are outpacing cures.

"The median deal-weighted cumulative par of bank and insurance Trups that have defaulted or are deferring interest increased by 45bp - to 20.37% of original par - in the first quarter of this year, while the median cumulative par of bank and insurance Trups deferring interest increased by 30bp to 4.44% of original portfolio par during that period," says Moody's analyst Rachid Ouzidane. "New instances of interest deferrals outweighed cures of deferrals."

The resumption of interest payments by deferring banks slowed down for two main reasons, Ouzidane says. Banks that continue to defer interest either have an agreement with a regional reserve bank that prohibits them from making interest payments on their Trups or they are conserving capital to strengthen their balance sheets. The remaining defaulted banks in Trups CDO portfolios are for the most part failed institutions that have been closed down by the FDIC.

The median weighted average rating factor of Moody's-rated Trups CDOs deteriorated to 572 in Q1, compared with 491 in the prior quarter. Nonetheless, the performance of US banks in general is mostly positive, according to the FDIC.

Revenue has increased, as have loan portfolios, while the number of unprofitable and 'problem banks' has declined. Community banks are leading the improvement, due to their minimal exposure to trading operations and the energy sector.

The median senior overcollateralisation ratio on notes originally rated Aaa improved in Q1, while the median senior overcollateralisation ratio on notes originally rated Aa3 and above was largely unchanged.

CDS

EM CDS volume up

Emerging markets CDS trading volume stood at US$363bn in 1Q16, according to a survey of 13 major dealers undertaken by EMTA. This represents a 5% decrease on 1Q15 volume of US$383bn, but a 43% jump compared to the US$254bn in reported transactions in 4Q15.

"The high volume this quarter should alleviate concerns that CDS is a shrinking market. The large increase this quarter brings trading volume to levels similar to those of 2014 and 2015, and still far above the volumes in 2012 and 2013, despite the regulatory limitations of trading some European credits," notes Jane Brauer, director and EM sovereign strategist at Bank of America Merrill Lynch.

She adds that EM CDS volumes were likely to grow as Argentine CDS contracts resumed trading last month.

The largest CDS volumes reported in the survey during the quarter were those on Brazil, at US$57bn. Survey participants also reported US$41bn in Turkish CDS, with Mexican volumes following at US$35bn.

The EMTA survey also included volumes on nine corporate CDS contracts, with the highest reported quarterly volume on Pemex, at US$3bn.

CDS

Norske auction due

An auction to settle the CDS trades for Norske Skogindustrier ASA is to be held on 22 June, following the determination of a restructuring credit event in respect of the entity (SCI 25 April). ISDA notes that further to and for the purposes of Section 13 of the 2016 Norske Skogindustrier ASA credit derivatives auction settlement terms, the €150m 11.75% senior unsecured notes due 2016 issued by the firm were repaid in full on 15 June.

CMBS

Credit metrics eyed

S&P reports a significant change in conduit/fusion CMBS credit metrics for 2016 transactions compared to the 2013-2014 vintages. The agency notes that collateral pools have continued to deteriorate, with higher loan-to-value (LTV) ratios, lower debt yields, greater hotel concentrations and more interest-only (IO) loans.

The weighted average S&P LTV has increased to 92.9% from 85.5% in 2013 and the weighted average S&P debt yield has declined to 8.9% from 9.6% in 2013. Given that loan leverage is a key credit metric in its CMBS rating analysis, the credit enhancement (CE) levels that the agency considers appropriate for conduit/fusion transactions have therefore increased.

Another key driver of increased CE levels is the growing proportion of lodging loans in today's conduit/fusion pools. The percentage of lodging properties in preliminary pools is now approaching 20% on average, compared with only 15% in 2014.

In addition, loan counts have fallen considerably this year, making recent deals significantly less diverse. Thus far in 2016, the average conduit deal is backed by 54 loans (the range is 30-112), compared with 75 in 2015.

Further, S&P's benchmark pool assumes a baseline 10/30 amortising loan and, all else equal, greater proportions of IO loans will lead to increasing CE requirements. The percentage of IO loans in deals continues to rise vintage by vintage. Thus far in 2016, full-term IO loans are up to 30% of deals on average from 24% last year, while partial-term IO loans are down modestly to 41% from 43%.

CMBS

CMBS pay-offs dip

The percentage of US CMBS loans that paid off on their balloon date slid modestly in May to 68%, almost five points lower than the April level, according to Trepp. The May tally is slightly below the 12-month moving average of 68.5%.

By loan count as opposed to balance, 68.3 % of loans paid off last month. On this basis, the pay-off rate was below April's level of 71.2%.

The 12-month rolling average by loan count is now 69.6%.

CMBS

Delinquencies inch up

US CMBS delinquencies increased by 6bp in May to 2.98% from 2.92% a month earlier, according to Fitch. The dollar balance of late-pays increased by US$173m to US$11.22bn, from US$11.05bn in April, driven by the addition of three loans sized at over US$50m into the index.

In total, new delinquencies of US$756m exceeded resolutions of US$543m. Fitch-rated new issuance volume of US$3.7bn in April (from four transactions) fell short of US$5.4bn in portfolio run-off, causing a decrease in the index denominator.

The largest new delinquency, which contributed to an 83bp spike in the mixed-use delinquency rate, was the US$150m City Place loan (securitised in CSMC 2007-C1). The loan was transferred backed to special servicing in February, due to increasing competition and declining tenant sales, having initially been modified into A/B notes in December 2011. The special servicer declined the borrower's discounted pay-off proposal and is moving forward with foreclosure.

The largest resolution last month was the Coventry Mall asset (MSC 2005-TOP17). The loan was liquidated with a 68% loss severity on its original loan balance of US$76.5m or an 81% loss severity on its loan balance prior to disposition of US$63.7m (see SCI's CMBS loan events database). The A-note sustained a partial loss, while the B-note suffered a full loss.

Current and previous delinquency rates by property type are: 4.56% for retail (from 4.42% in April); 4.15% for office (from 4.16%); 3.47% for hotel (from 3.59%); 0.87% for multifamily (from 0.90%); 3.41% for industrial (from 3.34%); 4.08% for mixed use (from 3.25%); and 0.79% for other (from 0.72%).

CMBS

Credit enhancement model offered

S&P has launched its Commercial Mortgage Evaluator (CME) tool, a proprietary model that can be used to aid credit risk analysis associated with US and Canadian CMBS collateral. The CME leverages S&P's CMBS rating methodology and utilises individual loan-level credit metrics to derive loan-level credit enhancement levels. These in turn are aggregated to determine pool-level credit enhancement levels, which reflect the credit risk of the loans within a given pool.

CMBS

Euro CMBS defaults drop

The 12-month rolling loan maturity default rate for European CMBS rated by S&P fell from 8.1% to 7% at the end of May. The senior loan delinquency rate increased from 43.7% to 45%.

The senior loan delinquency rate rise was driven by increases in both continental and UK loans. The rise for continental loans was from 56.9% to 58.7% and the rise for UK loans was from 19% to 19.6%.

There was only one loan - Eurocastle Office portfolio, securitised in EURO 28 (Vulcan) - scheduled to mature last month and it repaid in full on its maturity date. With two loans paying in full and one loan added to S&P's index of delinquent names, the number of delinquent loans dropped from 73 to 72.

Loans in the rating agency's special servicing index decreased from 91 to 89 as three loans repaid in full and one was added. The addition was IFB and Pavia Fortress, securitised in Windermere X. The departures were Brunel Shopping Centre securitised in DECO 6, the Peach loan securitised in Talisman 6 and the Cluster 1 loan securitised in EuroProp (EMC VI).

S&P notes that €4.8bn of the €40.3bn in outstanding loan balance is scheduled to mature in the next 12 months. Most of these maturing loans are secured on UK properties and 35% are scheduled to mature next month.

CMBS

Barbelling risk proliferating

Fitch warns that credit barbelling is becoming more common in US CMBS, which may place transactions at greater risk of losses over time. Such wide dispersion of credit risk within transactions is becoming more obvious as deal sizes shrink.

"Barbelling began to surface within Fitch's loan metrics last year and it is showing up more frequently in 2016," says Fitch md Eric Rothfeld. "The higher the expected loss and the greater the number of loans with high expected losses, the larger the potential effect on deal performance."

He adds that lower leverage among other loans in the pool will not necessarily offset this barbelling risk. As such, Fitch assigns higher credit enhancement levels at each rating level.

The agency's increased cashflow haircuts in 2015 and 2016 are among the contributors to the barbell in credit. Common drivers behind the increase in haircuts were loosening issuer standards for acceptable revenue and a different perspective from Fitch on the current point in the property cycle, with contrasting assumptions on market rents and leasing costs.

A notable example is two recent Fitch-rated deals - MSBAM 2016-C28 and WFCMT 2016-NXS5 - that launched and priced within days of each other. While the pools appear similar using average credit metrics, they have very different credit profiles when observed more closely and Fitch says its credit enhancement reflects this difference.

Insurance-linked securities

Dual ILS tools debut

Huang & Associates Analytics (HAA) has released two new ILS tools, RAPID Pro and Deal Tracker. They will be used to assist reinsurers and fund managers in areas that include comprehensive pricing, underwriting and fair valuation.

RAPID - short for Risk Aggregation Platform for ILS Decisions - is designed to provide a robust framework for fair valuation of transactions. Meanwhile, Deal Tracker is a tool used for designing customised workflow and tracking the progress of a deal throughout its life cycle.

HAA says that Deal Tracker can be licensed as either a standalone application or a fully integrated module of RAPID Pro.

Insurance-linked securities

Blockchain cat swap executed

Allianz Risk Transfer (ART) and Nephila Capital have successfully piloted the use of blockchain smart contract technology for transacting a natural catastrophe swap. The test-run not only demonstrates that transactional processing and settlement between insurers and investors could be significantly accelerated and simplified by blockchain-based contracts, but also points to other benefits, such as increased tradability of cat bonds and wider opportunities to apply this technology in other insurance transactions.

The two firms say that blockchain-based smart contract technology has the potential to facilitate and accelerate the contract management process of cat swaps and bonds. Each validated contract on the open shared infrastructure contains data and self-executable codes inherent to that contract. When a triggering event occurs that meets the agreed conditions, the blockchain smart contract picks up the predefined data sources of all participants and then automatically activates and determines pay-outs to or from contract parties.

"Blockchain technology would increase reliability, auditability and speed for both cat swaps and bonds, as less manual processing, authentication and verification through intermediaries is required to confirm the legitimacy of payments/transactions to and from the investors," explains Richard Boyd, Bermuda-based chief underwriting officer of ART. "By replacing the human interventions which are currently embedded throughout the entire risk-transfer process, frictional delays and the risks of human error are completely removed - with a radical effect on the speed and efficiency of the process and, in the case of bonds, on the tradability of such securities."

Blockchain-based smart contract technology allows digital execution of contracts with automated and distributed ledgers that are designed to be incorruptible, thus having the potential to significantly reduce the arbitration and validation functions traditionally performed by independent third-party institutions. ART and Nephila have worked with a number of firms to develop the proof-of-concept and believe that extensions of this technology have relevance across the insurance industry; for example, in optimising the payment processes involved in international fronting for captive insurers, where multiple process steps are involved in transferring premium from a corporate to its own subsidiary.

"In our journey to become more digital, blockchain promises to help us create more transparent, more convenient and faster services for our customers," says Solmaz Altin, Allianz Group chief digital officer.

NPLs

NPL sale announced

Fannie Mae has announced its latest sale of non-performing loans, including the fourth community impact pool that it has offered. The two larger pools of approximately 3,300 loans totalling US$526.1m in unpaid principal balance and the Miami-focused community impact pool of approximately 90 loans totalling US$20.1m in UPB are available for purchase by qualified bidders.

Bids are due on the two larger pools on 7 July and on the community impact pool on 21 July. The sale is being marketed in collaboration with Bank of America Merrill Lynch and CastleOak Securities as advisors.

NPLs

Legislation to support Italian SME NPLs

Moody's says that recent legislative initiatives in Italy should benefit SME NPL securitisations in the country through streamlining the insolvency process and improving loan recoveries. The issuance of SME NPL ABS is expected to re-emerge in Italy in 2016 after nearly ten years of dormancy.

The Italian government outlined its intent earlier this year to introduce rules establishing a guarantee mechanism to facilitate the transfer of NPLs from the books of commercial banks to securitisation vehicles (SCI 28 January). This was followed with the launch of the Atlante fund, which aims to use securitisation to help banks deleverage and shed non-core assets from their balance sheets (SCI 14 April).

Moody's says that these measures have combined with improving recovery prospects to relieve Italian banks of their NPL stocks. "However, the ultimate success of all the measures will depend on their efficient implementation across Italy," says Monica Curti, a vp and senior credit officer at Moody's.

"Recovery rates and times are key drivers of performance for NPLs, but these metrics are unpredictable within three years of default and vary widely," she continues. "After three years, recoveries of defaulted SME loans are relatively low. The lengthy and time-consuming insolvency procedures in Italy exacerbate the challenging nature of estimating recoveries."

The agency expects NPL recoveries to gradually improve over the next two years as the new framework is digested. Preliminary estimates by Banca d'Italia and the Italian Ministry of Finance anticipate a sharper improvement further into the future.

Moody's loan-level analysis shows that on average, secured loans recovered 22% within three years of default, while unsecured loans recovered 30% on average. However, more than 55% of the Italian secured and unsecured defaulted SME loans in Moody's sample have a recovery rate below 10%, while 8% of secured and 18% of unsecured loans have a recovery rate above 90%.

The U-shaped recovery rate distribution pattern implies variation and is slightly more pronounced for secured loans to the borrowers in the building and real estate sector, which typically account for 20% to 40% of the outstanding volume in SME ABS. Moreover, the U-shape recovery rate distribution becomes more pronounced over time. Moody's expects higher ultimate recovery rates for secured loans, all else being equal.

Risk Management

OTC margin initiative put on hold

NetOTC has decided to suspend plans to implement a structure which reportedly intended to save banks millions of dollars on uncleared OTC derivative margin payments. The risk solutions company says it has put its operations on hold due to the incompatibility with current regulatory rules.

The proposed structure had been designed to make the use of collateral more efficient through a centralised, pooled margin space. This was formulated in close collaboration between regulators, industry bodies, banks and other market players. The service would have reportedly allowed banks to pay only a fragment of the original total cost in margin payments.

However, NetOTC ceo Roger Liddell explains that certain regulations do not currently allow for a more efficient use of collateral. He says that the regulations also do not envisage a pre-determined orderly default management process.

"Both would have contributed substantially to regulators' stated objective of sound, stable, resilient, transparent and orderly markets," he notes. "I look forward to a more favourable regulatory environment in the future that will see NetOTC's market infrastructure solution reinvigorated."

Risk Management

Reporting regulations amended

The US CFTC has approved a final rule that amends existing swaps reporting regulations in order to provide additional clarity regarding reporting obligations for cleared swap transactions. The rule also aims to improve the efficiency of data collection and maintenance associated with the reporting of the swaps involved in a cleared swap transaction.

The rule removes uncertainty as to which counterparty to a swap is responsible for reporting creation and continuation data for each of the various components of a cleared swap transaction, including to further clarify whose obligation it is to report the extinguishment of a swap upon its acceptance by a derivatives clearing organisation (DCO) for clearing. The CFTC anticipates that the rule will have a number of other benefits, including a reduced likelihood of double counting notional exposures and an improved ability to trace the history of a cleared swap transaction from execution between the original counterparties to clearing novation.

The amendments that the rule implement include the: elimination of confirmation data reporting obligations for swaps that are intended to be submitted to a DCO for clearing at the time of execution; clarification of DCO continuation data reporting obligations for swaps that are accepted for clearing, including the obligation to report terminations to the SDR to which the swap was originally reported; and codification of no-action letters by proposing the elimination of the requirement for swap dealer/major swap participant reporting counterparties to report daily valuation data for cleared swaps.

The final rule will become effective 180 days following publication in the Federal Register.

Risk Management

Uncleared margin tool launched

Allen & Overy has teamed up with Deloitte to launch MarginMatrix, a new tool to help major banks deal with OTC derivative regulatory requirements set to begin in September. The digital end-to-end service is the first major collaboration between an international legal practice and one of the 'big four' professional service firms in creating such a product.

In light of EMIR rules that will add margin costs to any uncleared OTC transactions, MarginMatrix has been introduced to codify the laws in various jurisdictions and automate the drafting of tailored documents based on legal analysis. Where one document would normally take three lawyer hours to complete manually, Allen & Overy claims the new tool can deliver this in three minutes.

The law firm also claims that the time taken to manually handle the 10,000 contracts on average that any major bank holds should be reduced from over 15 years in lawyer hours to just 12 weeks with the system. Further, it seeks to alleviate logistical challenges, removing the need for clients to appoint and project-manage separate legal, technology and resourcing providers across the US, EU and APAC.

RMBS

Risk transfer trio closed

Fannie Mae last month completed three credit insurance risk transfer (CIRT) deals, continuing its efforts to reduce taxpayer risk by increasing the role of private capital in the mortgage market. The three deals - CIRT 2016-4, CIRT 2016-5 and CIRT 2016-6 - represent the largest cumulative CIRT transaction to date, shifting a portion of the credit risk on pools of single-family loans with a combined unpaid principal balance of approximately US$22.5bn to a group of insurers and reinsurers.

The covered loan pools for the three transactions consist of 30-year fixed rate loans with loan-to-value ratios greater than 80% and less than or equal to 97%. The loans were acquired by Fannie Mae from December 2014 through December 2015.

In CIRT 2016-4, Fannie Mae retains risk for the first 50bp of loss on a US$9.7bn pool of loans. If this US$48.6m retention layer is exhausted, reinsurers will cover the next 250bp of loss on the pool, up to a maximum coverage of approximately US$243m.

With CIRT 2016-5, the GSE retains risk for the first 50bp of loss on a US$9bn pool of loans. If this US$45m retention layer is exhausted, an insurer will cover the next 250bp of loss on the pool, up to a maximum coverage of approximately US$226m.

In CIRT 2016-6, the first 50bp of loss is retained on a US$3.8bn pool of loans. If this US$18.8m retention layer is exhausted, an insurer will cover the next 250bp of loss on the pool, up to a maximum coverage of approximately US$94m.

Coverage for these deals is provided based upon actual losses for a term of 10 years. Depending upon the pay-down of the insured pool and the principal amount of insured loans that become seriously delinquent, the aggregate coverage amount may be reduced at the three-year anniversary and each anniversary of the effective date thereafter. The coverage may be cancelled by Fannie Mae at any time on or after the five-year anniversary of the effective date by paying a cancellation fee.

Since 2013, the GSE has transferred a portion of the credit risk on US$656bn in single-family mortgages through its credit risk transfer efforts, including CIRT, Connecticut Avenue Securities and other forms of risk transfer.