News Analysis
Structured Finance
Stepping up
Double boost for FFELP SLABS market
Industry efforts to address the FFELP student loan ABS maturity issue have stepped up a gear with the launch of Nelnet's investor forum via the DealVector platform (SCI 17 June). The market received a further boost last week when Moody's released its updated FFELP student loan ABS methodology (SCI 15 June).
DealVector now has the top two sponsors of FFELP student loan ABS on its system, with Navient launching a similar investor forum last September (SCI 22 September). Such improved investor connectivity allows information to become actionable and change outcomes for the better, according to DealVector ceo and founder Mike Manning.
"Under the Navient and Nelnet indentures, maturity extensions need 100% consent, so it's critical that every investor is in the loop. When running consents, the DealVector platform allows issuers to view the aggregate face value of investors' holdings that have been registered, enabling them to see what percentage of the total outstanding is represented on the system. It therefore helps them to target their efforts towards the areas that need it most," he explains.
Greer McCurley, executive director of capital markets at Nelnet, says that when his firm first started thinking about extending its FFELP student loan ABS trusts, it believed it would be highly unlikely to achieve the 100% consent necessary. However, the firm was encouraged by Navient's success via the DealVector platform.
"One challenge we'd heard from investors is that some only wanted to communicate with us, while others only wanted to communicate with the bank we're working with on this (RBC) or not at all. DealVector allows them to communicate anonymously, which is a significant benefit," McCurley observes.
He adds: "We've heard from one of our largest holders of our bonds that they're about to load their positions onto the DealVector system and we're expecting significant participation from other investors in the coming weeks. Many are already familiar with the process from their experience with Navient and we've already had communication from other investors looking to target further Nelnet deals after the initial six have been extended. We want to ensure that as many of our bonds remain triple-A rated as possible."
The DealVector platform is currently passing 75%-80% of consents first time around. "We have 300 investors registered for the Navient amendments and there is a high degree of overlap with Nelnet investors. Each time we go through the process, we are increasing critical mass, so that consents become easier to pass," Manning observes.
He suggests that in future cases where an issuer has decided against extending maturities or making other transaction amendments, investors may decide to step up and seek action themselves. "Where investors want to find each other and split the cost of an extension, for example, our platform is perfect. As the process becomes more efficient, it becomes more economical - if you have a network, it's possible to unlock value by taking tangible action. We just launched www.DealVector.com/FFELPwatch to make it easier for investors holding FFELP paper to do exactly this."
McCurley believes that similar synergies can be achieved in other asset classes. "The big selling point of a platform like DealVector is that it facilitates investor communication, which is exceptionally problematic within the traditional fixed income custodian system. Every investor will need to have a conversation about restructuring or amendments at some point, no matter the asset class. DealVector is trying to tackle a problem that isn't easy to solve - unlocking value for both issuers and investors."
DealVector has been involved in a handful of cases when CLO equity investors called the deals, but Manning believes the next area of potential for the platform is in RMBS. He points to many deals where it makes sense to execute a clean-up call; for example, where the residual holder's position isn't cashflowing and they want to crystallise value or the servicer is facing expense, or investors want to arbitrage the value between the underlying loans and bonds.
"Servicers have the right to clean up once there is only 10% or less of the deal outstanding, but it's predicated on calling the bonds at par. There are many cases where bonds aren't trading at par, yet investors may be happy for them to be called because it still makes economic sense," Manning explains.
He continues: "This requires a vote, as does calling a deal if more than 10% is outstanding. Because voting is so hard to do today, investors and servicers end up leaving money on the table in these cases."
Meanwhile, generic FFELP student loan ABS spreads tightened by 10bp-20bp on the publication of Moody's final FFELP student loan ABS methodology. "My sense is that the market views Moody's methodology as positive - some participants view it as mildly so and others very positively. Participants had been concerned that a significant number of bonds would be downgraded to sub-investment grade, but although many bonds still have the potential to be downgraded, hopefully it will be at a lesser magnitude than expected," McCurley notes.
He continues: "Moody's expected loss approach will force participants to recalibrate their models, so it will take time for the impact to filter through. The agency's consideration of qualitative factors is also positive, as are some of the reassuring statements about the strong credit quality of the FFELP asset class."
Among the changes made to Moody's initial proposal are: the use of an expected idealised loss table as a benchmark for model output ratings; a probability-weighted model rather than a ratings-targeted pass/fail model; an increase in the number of scenarios to 28; expanded assumptions surrounding loan repayment rates to include death/disability probabilities, as well as IBR loan forgiveness rates; and allowing for both quantitative and qualitative analysis in final rating decisions. Structured product analysts at Wells Fargo suggest that such significant revisions highlight the modelling complexity and uncertainty associated with FFELP student loan cashflows.
"By calculating a probability-weighted net loss rate for 28 unique scenarios and comparing the combined loss rate to an expected idealised loss benchmark table, this builds in some flexibility around cashflow uncertainty, compared to a ratings-targeted pass/fail model," they observe.
The highest-weighted scenario is 'most likely' (at a 60% weight), with the other 27 scenarios based on a combination of the remaining scenario category assumptions (three remaining degrees of likelihood, three interest rate scenarios and three loan repayment behaviour scenarios). Each remaining scenario's weight is based on the product of the three scenario category weights used.
Voluntary prepayment rate assumptions, as well as forbearance and deferment assumptions appear to be more lenient than in the initial proposal. But the Wells Fargo analysts note that the updated income-based repayment assumptions may have differing impacts, depending on a loan pool's current performance.
Between 45% and 55% of a pool's IBR percentage will now be included in the forbearance assumption, compared to 75% in the initial proposal. However, the final assumptions take into account rising IBR rates that are higher relative to the average actual usage rates of 10% for consolidated loans pools and 15% for non-consolidated loan pools. Consequently, rising IBR rate assumptions may offset the lower 45%-55% inclusion percentage, depending on performance.
Moody's placed a further 266 tranches (totalling US$44.9bn) on review for downgrade, following its initial assessment of FFELP transactions under the updated methodology, on top of the 101 tranches (US$30.7bn) previously placed on review (SCI 10 July 2015). Accounting for roughly US$160bn in FFELP ABS outstanding, the agency now has just under half of the sector under review for possible downgrade, according to JPMorgan figures.
Downgrades to non-investment grade ratings are expected to be limited to a small percentage of the market, but investors will ultimately need to run bond-level analysis to assess this risk. JPMorgan ABS strategists note that modelling and insufficient data remain major hurdles in FFELP ABS, made only more complex by the final methodology.
"We expect investors will require significantly more resources to analyse the FFELP ABS sector, which could translate to lower liquidity and higher required spread concessions. Unfortunately, until Moody's actually takes rating action, the rating cloud does not simply disappear overnight with this publication of the final methodology," they observe.
The JPMorgan strategists suggest that FFELP ABS may not fully recover versus plain vanilla asset classes. The generic spread differential between FFELP ABS and credit card ABS was 9bp one year ago, before Moody's announced revisions to its rating methodology, versus 55bp now.
Nevertheless, with Fitch's stance also appearing to be less punitive than earlier communications had suggested, the worst-case scenario now seems to be off the table, according to McCurley. "It will be interesting to see how bonds trade this week in light of the news and what direction the market moves in now. The question is where will the consensus shake out from here."
CS
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News Analysis
Structured Finance
Sufficient scrutiny?
MPL verification enhancements sought
The resignation of Lending Club ceo Renaud Laplanche and the subsequent disclosure of 'control deficiencies' at the platform shocked the marketplace lending sector. Investors have pulled back and getting them onside again is dependent on demonstrating that the market can be open and transparent.
Lending Club has been a pioneer in marketplace lending ABS and was the first platform to have its loans securitised, in Eaglewood Consumer Loan Trust 2013-1, and already offers third-party loan verification for ABS deals. However, with investors spooked, there are concerns that this approach does not go far enough.
"We have structured a number of financings of marketplace lender loans and one of the things the lender does is allow a third-party to log into their system and view all of the loan information and verify certain data points on those documents with the ABS sponsor. The verification agent looks at items, such as loan amount, interest rate and term to maturity, and then verifies all of the information you need to calculate expected cashflow," says David Piotrowski, structured finance md, Waterford Capital.
As all of the documents are electronic, the verification agent can access and view online everything a customer has signed. The information is digitally vaulted, for protection.
Critics have suggested that loan verification - which essentially involves comparing two datasets and ensuring they match - is not an effective risk and compliance check. Global Debt Registry is one firm looking to enhance the industry standard.
"There is no independent loan-level ownership tracking, no tracking of collateral pledges, no verifying that funds were actually disbursed, no validation of data against trusted third-party data sources and little or no ongoing compliance and risk monitoring. Our approach is to bring much greater transparency and provide genuine loan validation," says Mark Parsells, executive chairman and ceo, Global Debt Registry.
He adds: "Our research included speaking to key players in the MPL ecosystem. We talked to investors, warehouse lenders, trustees, investment banks, rating agencies and regulators about what they wanted to see. From those discussions, it became clear that the market wanted real validation and true transparency. There were concerns about whether the loans and borrowers were actually genuine and whether loan-level data was accurate."
Piotrowski notes that an approach of re-underwriting loans, while too expensive to do for a whole pool, can be combined with the work of a verification agent to achieve a good level of verification. This would be one way of enhancing data accuracy checks.
He says: "A third-party accounting firm can come in and essentially re-underwrite the loans. Typically this would be done on a random basis, using a sample of about 10% of the loans."
As the cost of using them has come down, Piotrowski says he "cannot imagine a situation where you would not use a verification agent". The question, for him, is whether investors will pay for more in-depth due diligence.
It has been suggested that the US should copy the European Datawarehouse model and publically disclose all loan-level data. While this verified repository solution may well be effective, it is also regarded as something of a far-fetched solution. Parsells recognises, however, that a model similar to the European Datawarehouse could benefit the market.
He says: "It would not have to be a public system, however, as the private sector can usually do things better, faster and cheaper. Our approach will be similar to the Carfax model for autos. We are like Carfax for investors - an independent, trusted third-party that assures the certainty of assets."
Parsells continues: "It would require an independent company without any conflicts. A central point where data could be stored and checked and made available would be very beneficial, and it would be best to sort this out ourselves before the next downturn or regulatory drive comes in."
To grow the marketplace lending industry, lenders need to attract more permanent capital - be that in the form of asset managers, insurance companies, pension funds or sovereign wealth funds "For those investors to come to the market in any significant scale, there has to be confidence in the industry as an asset class," Parsells concludes.
JL
Data verification will be one of the subjects covered during an SCI webinar on 23 June. For a more in-depth discussion, join SCI for its second annual marketplace lending securitisation seminar on 28 June in New York.
SCIWire
Secondary markets
Euro secondary solid
The European securitisation secondary market remains solid ahead of Thursday's UK EU referendum.
Thanks to negligible activity due to the Barcelona conference all sectors were insulated against wider market volatility driven by Brexit fears last week. Improving broader sentiment on Friday and yesterday has left ABS/MBS secondary spreads largely unchanged on the previous week albeit on the back of very light volumes. However today does see four reasonably large ABS/MBS BWICs as sellers seek to take advantage of the better tone ahead of the vote.
In CLOs, activity was also hampered by Barcelona but activity did pick up quicker than in ABS/MBS over the past two sessions. The continuing buying bias in the sector saw some tightening on Friday and spreads across the board held firm yesterday.
Overall, there are currently five BWICs on the European calendar for today. Of the four ABS/MBS auctions the largest is an ABS, CMBS and RMBS mix due at 13:00 London time.
The 27 line 69+m current face list comprises: AYTGH II A, BESME 1 A1X, BILK 5 A, BSKY FRE1 A, CAR 2013-G1V A, COMP 2013-2 B, DECO 2012-MHLX A, DMPL X A2, DRVES 2 A, DRVUK 2 A, ECAR 2014-2 B, ECARA 5 B, GFUND 2016-1X A2A, GMG 2015-1 A, HYPEN 4 A2, ITALF 2005-1 B, LEEK 18X BC, LUSI 3 A, PARGN 19 A, PENAR 2014-1X A2, QUARC 1 A, SLMA 0 03/15/38, SLMA 2004-2X A6, STORM 2014-3 A2, TDA 13 A2, VCL 19 B and VELAH 4 A2. Five of the bonds have covered on PriceABS in the past three months - BILK 5 A at 100.11 on 21 April; GFUND 2016-1X A2A at 100.1 on 20 May; LUSI 3 A at 88.75 on 3 June; STORM 2014-3 A2 at 100.38 on 12 April; and VELAH 4 A2 at 98.8 on 3 June 2016.
There is also a four line €11m CLO list due at 15:00, which involves: HARVT 10X C, HARBM 6X A4F, JUBIL VIII-X E and MSIMM 2007-1X D. Two of the bonds have covered on PriceABS in the past three months - HARVT 10X C at 95.88 on 19 May; and JUBIL VIII-X E at 92.75 on 26 May.
SCIWire
Secondary markets
US CLOs cautious
The US CLO secondary market is in cautious mood ahead of the UK EU referendum.
"There's been a number of investors pulling out or showing some hesitancy until they see the decision of the vote," says one trader. "Things should pick up a little bit afterwards though."
The market is also still experiencing tiering, the trader adds. "There's a more picky attitude in the market right now, which is in response to a number of things including risk retention edging closer and wariness over the energy sector. At the top of the stack, spreads are as wide as 20bp between CLOs from higher end managers and lower end. This spread gets substantially wider the further down the stack you go."
Despite these ongoing issues, mezzanine paper is still seeing some healthy activity. "1.0 BWICs in particular have been bringing in some high bids," the trader notes. "There have been a number of pieces that we've shown interest in, yet a bid we've considered strong has in some cases not even come in as the cover."
There are currently five US CLOs on the BWIC calendar for today. The largest is due at 13:30 New York time and involves three line items - $18.35m CIFC 2011-1A B, $5.5m CIFC 2011-1A C and $58.5m MDPK 2012-10A B1. None of the bonds has covered on PriceABS in the past three months.
SCIWire
Secondary markets
Euro secondary settles down
After a flurry of activity over the past two sessions the European securitisation secondary market has settled down today to await news from the UK EU referendum.
Following a quiet Monday volumes picked over the next two days sparked by the increase in BWIC activity noted on Tuesday and continuing improvement in wider markets. Flows were relatively healthy yesterday too and the session closed with all sectors, in both euro and sterling assets, flat to slightly tighter on the week.
Today looks set to be quiet as all participants wait on the UK referendum result where a remain vote is overwhelmingly priced in. There are currently no BWICs on the European schedule for today.
News
Structured Finance
SCI Start the Week - 20 June
A look at the major activity in structured finance over the past seven days
Pipeline
The industry conference in Barcelona reduced primary market activity last week. There were four ABS as well as one RMBS and two CMBS added to the pipeline.
US$811m Ford Credit Auto Owner Trust 2016-REV2, US$123m Golden Bear Funding Notes Series 2016-1, US$156.07m Sierra Auto Receivables Securitization Trust 2016-1 and US$379.8m SoFi Consumer Loan Program 2016-1 accounted for the ABS. The RMBS was US$400m NRZ Advance Receivables Trust Series 2016-T1 and the CMBS were US$115m Cherrywood SB Commercial Mortgage Loan Trust 2016-1 and US$700m SBA Tower Trust Series 2016-1C.
Pricings
A considerable number of deals did leave the pipeline. There were 11 ABS prints as well as two RMBS, four CMBS and five CDO/CLOs.
The ABS were: €1.026bn Alba 8; CNY3.68bn Bavarian Sky China 2016-1; US$980m Chesapeake Funding II Series 2016-2; €5bn BPCE Consumer Loans FCT 2016-5; US$300m Exeter Automobile Receivables Trust 2016-2; €400m FCT Eurotruck Lease III; US$198m Foursight Capital Auto Receivables Trust 2016-1; US$340m Massachusetts Educational Financing Authority Issue J Series 2016; US$111.2m NMEF Funding 2016-A; US$551m SMB Private Education Loan Trust 2016-A; and €1.471bn Towers CQ 2016.
The RMBS were US$400m ASFR 2016-1 and US$161.7m COLT 2016-1. The CMBS were US$1.037bn FREMF 2016-K55, US$500m LSTAR 2016-4, US$550m SBL Commercial Mortgage Trust 2016-KIND and US$240m VB-S1 Issuer Series 2016-1.
The CDOs and CLOs were S$600m-equivalent Astrea III, US$400m Galaxy XXII CLO, €407.4m Laurelin 2016-1, US$401.45m Seven Sticks CLO 2016-1 and US$411.25m Venture XXIII.
Markets
US ABS supply year-to-date is roughly US$20bn down on the same period in 2015. Primary spreads are unchanged week-over-week. JPMorgan analysts say: "We continue to see good demand, though off-the-run names/assets are taking a tad longer to digest. The usual slower pace of activity typical in the summer could be a welcomed lure for investors to re-focus."
US CMBS triple-A spreads have been hovering in the swaps plus 120bp area for a while. Citi analysts note that investors still appear cautious on triple-B minus paper "despite its relatively high yield in the mid- to high-600s" area.
Editor's picks
Trigger point: 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...
Attack force: The High Court in London decided five cases brought by class X noteholders in 2006 and 2007 vintage European CMBS in April (SCI 13 May). The overall outcome was the same for both judgments - the claimants failed - but the contrasting approaches taken by the judges leave structured finance agreements open to attack using general legal principles, given the continued uncertainty over how to interpret them...
Going green: 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...
Deal news
• 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.
• 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.
• 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.
• 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.
Regulatory update
• 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.
• 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.
• 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.
Deals added to the SCI New Issuance database last week:
A10 Term Asset Financing 2016-1; ALM XVIII; Assurant Commercial Mortgage Trust 2016-1; Babson Euro CLO 2016-1; BACM 2016-UBS10; Blue Halo Re series 2016-1; BMW Canada Auto Trust 2016-1; Brightwood Capital Fund 2016-3; Cairn CLO VI; California Republic Auto Receivables 2016-2; CCG Receivables Trust 2016-1; CGCMT 2016-C1; Chase Issuance Trust 2016-2; Colony Starwood Homes 2016-1 Trust ; Driven Brands Funding series 2016-1; DT Auto Owner Trust 2016-3; FADE series 10 tap 1; FADE Series 21 tap 3; First Coast Re series 2016-1; FREMF 2016-K55; FREMF 2016-KF17; Harley-Davidson Motorcycle Trust 2016-A; La Trobe Financial Capital Markets Trust 2016-1; Laetere Re series 2016-1; Landmark Issuer Series 2016-1; Navient Student Loan Trust 2016-3; New Residential Mortgage Loan Trust 2016-2; Ocean Trails CLO VI; Oxford Finance Funding Trust 2016-1; Queen Street XII Re; Sequoia Mortgage Trust 2016-1; STACR 2016-DNA3; Swiss Auto Lease ABS 2016-1; TICP CLO V 2016-1; Towd Point Mortgage Trust 2016-2; Trillium Credit Card Trust II series 2016-1; UNITE (USAF) II; VB-S1 Issuer series 2016-1; VCL Master Netherlands; VINZ 2016-1 Retail Auto Loan Securitization Trust; Voya CLO 2016-2; Westcott Park CLO; Westlake Automobile Receivables Trust 2016-2
Deals added to the SCI CMBS Loan Events database last week:
BACM 2006-3; BACM 2006-4; BACM 2007-3; CD 2005-CD1; EPC 3; GCCFC 2004-GG1; GCCFC 2007-GG9; GSMS 2006-GG6; GSMS 2007-GG10; GSMS 2011-GC3; JPMCC 2005-CB12; JPMCC 2006-CB15; JPMCC 2006-LDP7; JPMCC 2006-LDP9; JPMCC 2007-LD11; MSC 2005-IQ9
News
Structured Finance
Brexit effects
The immediate financial market reaction to the UK's decision to leave the EU has been pronounced, with spreads on senior financials and subordinated CDS indices higher by around 30bp and 70bp respectively. In the European securitisation secondary market, dealer bids were wider across the board at the open, but little trading was seen in the first few hours.
In the short term, there appears to be less concern about LCR-eligibility of UK RMBS and covered bonds due to an EU exit and more concern about UK fundamentals, as the likelihood of the economy going into recession and the housing market being subject to a correction has increased. "Although most RMBS and all covered bonds are well protected in this scenario, we clearly see risks rising. A part of this has already been priced in, but given the unexpected outcome, more spread widening in this jurisdiction seems likely in our view," observe Rabobank credit analysts.
They add that the implications for non-UK ABS are less clear, but overall there doesn't seem to be many reasons why European discount margins would widen significantly from here.
Looking further ahead, the Brexit referendum vote is expected to result in a prolonged period of uncertainty, with UK long-term benchmark interest rates declining due to elevated risk-aversion and the anticipation of lower investment and economic growth. "More generally, we expect risk premiums to increase due to heightened and prolonged uncertainty," the Rabobank analysts note.
They add: "This implies that the cost and availability of financing for a broad range of UK borrowers could actually increase. A 50bp-150bp increase in average credit spreads - with lower rating classes seeing more significant widening - would appear possible, although there are several reasons to expect any moves to be contained by the fact that actual Brexit is still relatively far away and countervailing measures by the Bank of England, both in terms of liquidity and possibly new asset purchases if deemed necessary."
From the European perspective, core eurozone yields are initially expected to rally and curves flatten bullishly on the back of safe-haven flows. In the case of a messy exit, peripheral spreads are likely to widen, especially if the coherence of the rest of the EU - and the eurozone - is at stake.
Fitch believes that the 'leave' result is credit negative for most sectors in the UK, due to weaker medium-term growth and investment prospects, as well as uncertainty about future trade arrangements. The agency is set to review the UK's sovereign rating shortly, with any negative rating action affecting the relatively small number of sovereign-linked or capped ratings in infrastructure, public finance and structured finance and government-guaranteed bank debt. Overall, however, it expects near-term rating actions for other sectors to be limited.
In the medium to long term, any broader rating actions are likely to depend on factors such as the size and duration of the impact on GDP, the extent of sterling depreciation and their subsequent effect on inflation, asset prices, unemployment and interest rates. Failure to agree favourable trade arrangements would also be a significant negative for some sectors, according to Fitch.
Further, the UK's status as a major international banking hub could be damaged as some business lines shift to the EU. Higher import costs and pressure on exports - due to the potential imposition of tariffs - would also be broadly negative for corporates, while the extent to which the UK would be able to limit net inward migration could be significant for some asset classes.
Meanwhile, Moody's suggests that the lasting credit impact of the vote to leave will depend on the nature of the UK's new ties with the EU. The agency's central assumption is that the two sides will eventually come to an agreement that preserves most, but not all, of their current trading arrangements. However, it warns that the finer details in areas such as access to the single market, regulation and immigration will have a significant bearing on the new operating conditions for debt issuers.
In terms of the derivatives market, ISDA says it is working with members to ensure the sector is able to continue functioning safely and efficiently. The association stresses that the UK vote to leave the EU will not have an immediate impact on the legal certainty of existing derivatives contracts, nor will it require any immediate contractual change or action from counterparties.
"Once the UK government serves formal notice of its intention to withdraw, the UK will continue to remain a member of the EU for at least two years. During that time, existing European treaties, directives and regulations will remain in force," ISDA notes.
The association adds that it has conducted detailed analysis on the contractual implications of Brexit and has highlighted a number of potential issues that counterparties will need to consider during the two-year negotiation period. It will also convene applicable working groups and hold a series of industry calls to ensure derivatives market participants are prepared.
CS
Job Swaps
Structured Finance
Trading head switches to rival
Mehdi Kasani has joined BNP Paribas to head its European ABS trading team, based in London. He joins from RBC Capital Markets, where he was European head of ABS and structured credit trading. He has also held senior roles at Citi and Lloyds, trading ABS and RMBS for both banks.
Job Swaps
Structured Finance
Atrato boosts research expertise
Atrato Advisors has hired Andy Vantine to lead its credit and event-driven strategy research, reporting to the company's director of research, Michael Boensch. Vantine had previously been co-director of research at Chi-Rho Financial.
Alongside Vantine's appointment, Atrato head of operational due diligence, Danny Santos, has assumed the additional role of chief compliance officer. Further, analyst Maria Razaq will move into a newly created portfolio analytics role.
Atrato provides alternative investment advice and research to financial firms, including wealth management platforms and institutions with unique alternative investment programmes. In January this year, it engaged with Dynasty Financial Partners and iCapital Network to support their respective hedge fund platforms.
Job Swaps
Structured Finance
Pillarstone brings in trio
Pillarstone has made three new hires as part of its continued European push. The appointments are Jonathan Conway and Pablo Crespo as partners, and Michele Sabatini as director.
Conway joins following his role for Barclays as EMEA head of restructuring and EMEA head of CRE and debt for equity. Meanwhile, Crespo arrives as a former director for AnaCap, while Sabatini moves from his role as director at Bregal Capital.
The three new hires join Pillarstone's London office and are led by ceo John Davison. They arrive after the company only last month announced the establishment of a platform in Greece, to add to the expansion of its Italian base in 2015.
Pillarstone is a portfolio company of certain funds and accounts managed or advised by KKR Credit. The company's primarily role is in supporting banks in managing exposures to non-core and underperforming assets.
Job Swaps
Structured Finance
Marathon bolstered
Blackstone Strategic Capital Holdings Fund has acquired a passive, minority interest in Marathon Asset Management. Concurrent with this transaction, Marathon partner and coo Andrew Rabinowitz has been elevated to president and coo.
Additionally, Marathon senior md Vijay Srinivasan has assumed responsibility for overseeing global credit research. This position was formerly held by Richard Ronzetti, who has announced his retirement.
Marathon will retain autonomy over its business management, operations and investment processes, and will continue to be led by the existing management team. Terms of the transaction were not disclosed.
Job Swaps
Structured Finance
Agency recruits trio
Morningstar Credit Ratings has made a trio of new hires in New York, including Lea Overby as md, leading structured finance research. This position is a newly created role for the agency, which will see Overby head up structured finance initiatives and support its analytical team in MBS, ABS and CLOs.
Prior to moving, her most recent role was as executive director and head of CMBS and ABS research at Nomura Securities. Previous to that, she was responsible for management and surveillance of a large CMBS and ABS portfolio for BNY Mellon.
Jonathan Lam has also joined Morningstar, focusing on ABS as svp. Lam specialises in structured finance and securitisation methodology, with an emphasis on modelling, and will focus on building the CLO business. He is joined by the final addition, Chen Meng, who is a quantitative analyst across multiple asset classes.
Lam arrives from Kroll Bond Rating Agency, where he focused on various areas, including aircraft securitisation and evaluating venture capital loan portfolios. Meng's most recent role was as a quant developer in the financial modelling group. His work consisted of modelling and implementing RMBS prepayment and default models, as well as CLOs.
Job Swaps
CDO
Second successor manager selected
The holders of a majority of the controlling class of Gramercy Real Estate CDO 2007-1 have selected C-III Investment Management as successor collateral manager. Should any noteholders wish to object to the appointment, they are requested to notify the trustee in writing by 21 July.
Dock Street Capital Management had previously been put forward as successor collateral manager (SCI 19 May), after a notice of resignation was received from the collateral manager. However, the notice regarding Dock Street's appointment was withdrawn and made void on 7 June.
Job Swaps
CMBS
Business development head hired
Solutus has recruited Gareck Wilson from Brookland Partners in a senior role to develop its UK business as part of the firm's expansion plans. As head of business development, he brings diverse high-end experience gained across the real estate finance sector in the UK, Europe and internationally, including debt restructuring, corporate advisory, lending, securitisation and capital markets.
In his previous role at Brookland, Wilson acted as lead financial advisor to clients on a wide variety of high profile and complex commercial real estate debt restructurings and work-outs, totalling in excess of €10bn. He also arranged circa €500m of debt for clients in both loan and bond format and acted as the sales advisor to creditors on the work-out and subsequent sale of a major nursing home operator in the UK.
Previously, he has worked in senior positions for Deutsche Bank in London and Macquarie Capital Advisors in Sydney in a career encompassing over 12 years' experience in the banking and finance sector.
Job Swaps
Risk Management
Valuations vendor acquired
Markit is set to acquire Prism Valuation, a provider of independent valuation and risk analysis of derivatives and structured products. The acquisition will complement Markit's portfolio valuations service and enable the firm to offer customers enhanced coverage of complex OTC derivatives and structured OTC products. It will also expand Markit's customer base among regional banks and structured product issuers.
The acquisition is expected to close in the coming weeks. Financial terms were not disclosed. Following completion of the acquisition, Prism Valuation will be integrated with Markit Portfolio Valuations in the valuation and trading services segment of Markit's information division.
Job Swaps
Risk Management
LatAm partnership agreed
Numerix has partnered with Mexico's Proveedor Integral de Precios (PiP), the leading independent price provider in Latin America. Numerix will enrich the PiP Analytics service platform with risk sensitivities, market risk factors, credit and counterparty risk factors, and performance attributions, including CVA, PFE, DVA, DV01 and VaR. The new analytics platform provided by PiP offers real-time analytical services that allow users to access a wide range of data and analytical tools.
PiP notes that as the calculations of CVA and PFE have become increasingly important risk management mechanisms, especially in the Mexican and Colombian derivatives marketplace, it is focused on further developing value-added products. Access to risk analytics that will help them calculate counterparty risk is expected to enable clients to meet requirements set by the regulators in a cost-effective manner.
Job Swaps
RMBS
MERS set for 'modernisation'
ICE is set to acquire a majority equity position in MERSCORP Holdings, owner of Mortgage Electronic Registrations Systems (MERS). In addition, the two companies have entered into a software development agreement to modernise and enhance the MERS platform.
"This agreement brings the strengths of our organisations together to benefit the US residential mortgage finance market," comments Jeffrey Sprecher, ICE chairman and ceo. "It also complements our data and technology expertise in diverse, regulated markets. We are pleased to bring our strong track record of innovation, governance and operational execution to MERS, and look forward to contributing to the evolution of mortgage market infrastructure."
Under the agreements, ICE will rebuild the MERS infrastructure, which is expected to shift its operation to an ICE data centre in the first half of 2018. In particular, eNotes - which are electronic promissory notes and electronic processing that serves lenders and consumers - will continue to be supported.
The transaction is expected to close at the end of June.
News Round-up
ABS
ABL role for British Steel purchase
Funds advised by Greybull Capital have completed the acquisition of British Steel's long products business from Tata Steel. AlixPartners Corporate Finance managed the debt raising process, in which a £150m multi-asset asset-based lending (ABL) facility was provided by PNC Business Credit.
News Round-up
ABS
PACE, solar deals come to fore
The US solar and PACE ABS market has been busy this week, led by Spruce Finance bringing the largest deal so far to encompass unsecured residential energy efficiency loans and retail instalment contracts. The US$83.78m dual-tranche Spruce ABS Trust 2016-E1 received investment grade ratings from Kroll Bond Rating Agency.
The class A notes were assigned a single-A rating by the agency. The notes have a coupon of 4.32% and are expected to be repaid by 2022. The triple-B rated class Bs have a 6.9% coupon, with a repayment expectation of 2023. Citi acted as sole structuring agent and bookrunner for the transaction.
The firm has also hired capital markets expert, Darren Thomas, as its new cfo. Thomas joins from B2R Finance and reports to Spruce ceo Nat Kreamer.
Meanwhile, Renew Financial placed its second securitisation of PACE bonds this week. The US$123m deal, dubbed Golden Bear series 2016-1, is backed by over 4,800 PACE-finance home energy improvement projects and has a 3.75% coupon.
Kroll was again involved in rating the deal, assigning a double-A label, while Natixis Securities America structured and placed the deal. Further, the transaction was considered a green bond based on the principles published by the International Capital Market Association.
The company's second deal builds on its recent US$70m funding round, a new partnership with Rainforest Trust and the appointment of Kathleen Brown to the company's board of directors.
News Round-up
Structured Finance
Opportunities fund closes
Asset manager Hamilton Lane has closed the Hamilton Lane Strategic Opportunities Fund 2016, which represents more than US$210m in limited partner commitments, exceeding the initial US$150m target. The fund is focused on making credit-orientated investments with consistent cash yield.
The fund consists of new and existing Hamilton Lane investors from around the world, including insurance companies, Taft-Hartley pension plans, endowments and foundations, family offices and other financial institutions. The fund is the second dedicated vehicle of its kind and serves as an extension of Hamilton Lane's existing credit platform.
News Round-up
Structured Finance
Cracks emerging in US housing
A robust housing market has not prevented a number of 'minor' cracks from opening up within US housing, reports Fitch. Rising interest rates, demographics and employment growth point to a positive 2H16 and start to 2017, but challenges for the housing recovery include ongoing labour shortages and the potential for it to become more widespread.
Fitch believes that current trends have created a better platform for first-time buyers to purchase houses. Home prices nationally appear to be on a solid footing as far as RMBS is concerned, though some overvalued regional pockets are growing. Home prices in San Francisco, Phoenix and Las Vegas are all roughly 15% overvalued, while most major markets in Texas are overpriced by roughly 10% to 15%.
Another headwind for some undervalued housing markets is shadow inventory. New York's distressed inventory in particular remains roughly three times higher than the level ity was in 2007. The distressed supply will remain a drag in New York until the end of 2018.
The somewhat uneven forward movement for single-family housing is in contrast to multifamily REITs. Apartments are still in favour over homeownership, which could be a continued plus for multifamily REITs. Fitch adds that the sector is still able to deliver record rents and occupancies, in spite of a fairly tepid recovery for the broader economy, due in large part to the lower home ownership rate.
Meanwhile, Fitch has been fielding a common question from CMBS investors as to whether multifamily properties are past their peak. However, even though they are decelerating, multifamily operating fundamentals remain amongst the best in CRE. Millennials are now the largest segment of the US population, which should be a plus with many likely to opt for renting apartments before buying homes.
That said, markets like Seattle, Washington DC and Austin may be susceptible to declines due to additional supply coming online in the near term. Oil-rich markets like parts of North Dakota and Texas are also areas of concern, with rent growth slowing and vacancies slowly increasing.
News Round-up
Structured Finance
NPLs sold to repeat bidder
Freddie Mac has sold its latest batch of NPLs, auctioning off an additional 2,879 in deeply delinquent loans. Previous successful bidder, Lone Star Funds 9 Mortgage Holdings, was successful in picking up four of the five pools this time around - at US$516.6m worth of loans - while Upland Mortgage Acquisition acquired the remaining US$189.7m pool.
Three of the pools were geographically diverse SPO pool offerings. The two remaining pools were New York- and New Jersey-only pools. All five pools were sold at a weighted average price in the mid-60s as a percentage of the total unpaid principal balance.
The loans have been delinquent for almost five years. Mortgages that were previously modified and subsequently became delinquent comprise approximately 29% of the aggregate pool balance. The aggregate pool has an LTV ratio of approximately 92%, based on broker price opinion.
The transaction is expected to settle in August after marketing began on 25 May. Bayview Loan Servicing was servicer for the loans, while Bank of America Merrill Lynch and The Williams Capital Group advised Freddie Mac on the deal.
News Round-up
Structured Finance
'Transformative' changes for Indian ABS
The introduction of three significant regulatory changes over the past two months could have transformative implications for India's structured finance market, according to Moody's. A new tax regime is expected to lift post-tax investment returns from securitisation trusts, changes with regard to foreign portfolio investors (FPIs) should encourage foreign investment and changes to deal structures, while a new bankruptcy code will reinforce creditors' rights.
"The changes will improve returns to investors, promote foreign investment and improve the resolution process in the event of default, thereby strengthening creditor rights," says Vincent Tordo, an analyst with Moody's.
The new tax rule will increase post-tax returns from investments in pass through certificates, whose issuance volumes have fallen due to lower demand from bank investors put off by current lower returns. Effective 1 June, investors can claim a tax deduction against income from investments in PTCs issued by securitisation trusts and adjust for expenses incurred in relation to securitisation income.
Further, FPIs will be allowed to invest in Indian PTCs under a draft circular published by the Reserve Bank of India on 16 May. The participation of foreign investors through the new FPI rules will help the Indian ABS market evolve, so that it is more in line with global practices; for example, by evolving from single-tranche structures to those with multiple tranches and multiple investors.
Meanwhile, the new national bankruptcy code - passed by the Indian Parliament on 11 May - should over time strengthen the legal framework of the country's credit markets by significantly increasing the bargaining power of creditors against debtors in the resolution of distressed assets. Under the current legal framework for asset resolution, the process takes longer and recovery rates are lower compared with other jurisdictions in Asia. The code will also provide greater clarity on the insolvency process, allowing the impact of an originator default to be better assessed.
News Round-up
Structured Finance
Securitisation SPC prepped
China Bank Capital Corporation is set to establish a special purpose corporation known as CBC Assets One (SPC). The vehicle will hold the assets of China Bank Capital securitisations, including property developer 8990 Holdings' forthcoming PHP5bn contract-to-sell receivables deal (SCI 25 April). The bank says the addition of this new subsidiary will "round out its offerings and help improve its capabilities on the capital origination side".
News Round-up
Structured Finance
Asset finance targeted
The British Business Bank has opened its enterprise finance guarantee (EFG) accreditation process for new lenders, including asset finance providers. The programme aims to increase the number and diversity of lenders offering EFG-supported borrowing facilities to smaller businesses.
The re-opening of EFG lender accreditation is in response to one of the recommendations from the Enterprise Finance Guarantee Strategic and Operational Design Review 2015/6, published in April. The review highlighted the need to increase the number and diversity of EFG-accredited lenders and broaden the range of products EFG could support.
The review made several other recommendations, including engaging further with the asset finance sector. The British Business Bank is working with the Finance & Leasing Association to widen the scope of EFG to include support for asset finance lending.
The EFG currently supports £200m-£300m of finance per annum, delivered to the market via more than 40 accredited lending partners, including smaller specialist lenders, invoice finance firms and community lenders. It is open to qualifying smaller businesses with turnover of up to £41m and can be used to facilitate new lending or, to a limited extent, to refinance existing debt. It can be used to support term loans (including asset financing) and revolving credit facilities (including overdrafts and invoice financing).
News Round-up
Structured Finance
MPL webinar scheduled
SCI is hosting a complimentary webinar exploring how the marketplace lending sector is responding to recent developments. The event is being held at 7pm UK time on 23 June, but will also be available to download from the SCI website afterwards.
The webinar will cover questions raised by Lending Club's recent difficulties, not least the importance of thorough due diligence and data verification. It will also examine the changing regulatory environment and what to expect from the market during the second half of the year and beyond.
Panellists include: Brady Akers, director, Orchard Platform; Chris Kennedy, md, MountainView; and Charles Moore, cco, Global Debt Registry. To view the webinar, email SCI for a complimentary registration. The recording will be available to download via the SCI website after the event.
News Round-up
Structured Finance
Strategic initiatives fund launched
DFG Investment Advisers has completed a US$100m first closing for a fund that will enable it to pursue strategic initiatives. The move follows the completion of its fourth CLO transaction - the US$406m Vibrant CLO IV - via Goldman Sachs (see SCI's new issue database).
Volkan Kurtas, DFG's founder, comments: "The CLO management landscape is undergoing a sea change. Risk retention rules taking effect at the end of 2016 will accelerate this process. We believe the launch of our strategic fund is an important milestone that will allow us to thrive and grow in such a rapidly changing environment."
As of June, DFG's assets under management exceeded US$2.5bn. Alberta Investment Management Corporation acquired a minority stake in the firm in January, on behalf of certain of its clients.
News Round-up
Structured Finance
MPL conference line-up confirmed
Panellists have been confirmed for SCI's Second Annual Marketplace Lending Securitisation Seminar, which is being held on 28 June in New York. The event is being held at Kaye Scholer's offices at 250 West 55 Street.
The conference programme consists of a series of panel debates focusing on issues affecting the marketplace lending sector. Panel sessions include financing, platform differentiation and emerging assets in the marketplace lending space.
Speakers include representatives from: Blue Elephant Capital Management; CommonBond; Credit Suisse; DBRS; First Associates; General Atlantic; Global Debt Registry; Goldman Sachs; Grais & Ellsworth; Kaye Scholer; LendingHome; Morgan Stanley; MountainView Capital Holdings; NSR Invest; PeerIQ; Prudential; RealtyMogul; Servatus; Sharestates; and Thomson Reuters.
Please email for a conference registration code or click here and follow the link to register.
News Round-up
CDO
MBIA-wrapped CDOs downgraded
S&P has lowered the ratings on 11 classes of notes from six US CDOs to triple-C from single-B, following the downgrade of MBIA Insurance Corp (SCI 17 June). The affected transactions are Coronado CDO, Fulton Street CDO, Mulberry Street CDO, Mulberry Street CDO II, Oceanview CBO I and Zohar II 2005-1.
S&P says it bases the ratings on these notes on the financial insurance/guarantee that MBIA Insurance Corp provides. For insured classes of notes, its rating is generally the higher of the rating on the insurer or the S&P underlying rating (SPUR) on the tranche. Because the SPURs on the 11 rated classes are lower than the current triple-C rating on MBIA Insurance Corp, the ratings on these notes depend on the insurer and, therefore, the ratings have been lowered.
News Round-up
CDS
Norske auction settled
Yesterday's CDS auction for Norske Skogindustrier ASA comprised four buckets, with 10 dealers submitting initial markets, physical settlement requests and limit orders to settle trades across the market referencing the entity. An auction in respect of Bucket 1 was not held, following the repayment of the €150m 11.75% senior unsecured notes due 2016 (SCI 17 June), and the final price was deemed to be 100. The final prices for Buckets 2, 3 and 4 were determined at 29.625, 27 and 12 respectively.
News Round-up
CLOs
Anchor investment proposed
The IFC has disclosed that it is considering becoming an anchor investor in United Asia Loan Funding, the Asia-Pacific CLO co-managed by UOB Asset Management and SC Lowy Asset Management (SCI 2 March). The transaction will securitise primarily Asian emerging market loans that were originated by both global and regional banks.
United Asia Loan Funding is expected to be sized at approximately US$400m and is designed to provide 100% capital relief to contributing banks. The IFC is proposing to invest up to US$80m in multiple classes of mezzanine securities issued by the vehicle. It says that the objective of its investment is to restart the CLO market in Asia post-financial crisis and to deepen the region's capital markets.
News Round-up
CMBS
CRE 'storm' predicted
US commercial real estate (CRE) prices could drop as much as 5% over the next 12 months, according to a new PIMCO report. The price decline could come from a confluence of factors, including volatility in public markets, tightened regulations, maturing loans and uncertain foreign capital flows - a number of which tie into the performance of CMBS.
The report notes that although US CRE fundamentals have been strong, a number of headwinds damaged liquidity and prompted the 'brewing' of a 'storm'. This includes the combination of Dodd-Frank regulatory pressures and oil-induced fears leading to several hedge funds unloading positions, including those in subordinate US CMBS.
Banks have also reduced their balance sheet inventory by nearly half in the last two years. PIMCO notes that hedge funds hold about 40% of subordinate US CMBS positions and, as they began selling to meet redemptions in February, banks were unable to provide liquidity. As a result, prices for these subordinate CMBS positions fell by as much as 20% in a matter of weeks.
"CMBS loan origination platforms also have been crushed by the plunge in prices, as banks and originators found their recently originated loans, intended for securitisation, to be underwater based on CMBS pricing," adds PIMCO. "According to Bank of America, CMBS issuance in the first quarter of 2016 tumbled by over 30%."
The impact was felt in the CRE private market, due mainly to CMBS representing over 20% of the debt origination market in 2015. CMBS lenders increased rates on their debt quotes by 50bp to 100bp and buyers reduced property bids to maintain target returns.
Broker transaction volume affirmed this dynamic when 1Q16 transactions dropped 11% compared with the same period in 2015, according to CBRE. PIMCO's report says that regulation will remain a headwind for CMBS and CRE for the foreseeable future.
The looming maturity wall is also outlined in the report, with more than US$200bn of 10-year CMBS loans set to mature over the next three years. However, the investment manager predicts that it will quickly alter underlying credit profiles in CMBS. This could create attractive entry points for nimble capital that understands CMBS structures and the underlying CRE assets.
News Round-up
CMBS
Hope note provisions 'provide fix'
Provisions that exclude hope notes in determining who controls a CMBS transaction correct a potential misalignment of interest, says Moody's. These provisions are appearing in a small but growing share of new CMBS transactions.
"The new provisions we are seeing in servicing agreements place control of a CMBS transaction in the hands of certificateholders with bond positions that are supported by current property values," says Moody's vp Chaim Gottesman.
Hope notes are subordinate notes created by a special servicer during a mortgage loan workout that would not recover its principal balance based on current property values. Credit-neutral servicing agreements provide for the calculation of a collateral deficiency amount when a hope note has been created from a mortgage loan.
"The application of the collateral deficiency amount is in a manner similar to the way appraisal reduction is used in CMBS 2.0 to identify a transaction's controlling class," adds svp Daniel Rubock.
Credit-neutral agreements also provide that monies from loan recoveries and liquidation proceeds are applied to accrued interest on the collateral deficiency portion of a mortgage loan only after recovered loan proceeds have been allocated to outstanding loan principal. Moody's considers pooling and servicing agreements that do not include such provisions to be credit negative, since they may allow subordinate investors to retain control over a deal beyond the point at which they would otherwise have lost it.
News Round-up
CMBS
Multifamily supply ups risk
While multifamily CMBS ratings should be unaffected, Fitch says that there is rising risk of class A overbuilding in some submarkets. The concentration of high-end construction in 12 metro areas is intensifying and new supply in the student housing sector continues to break records.
The rating agency notes that the majority of new multifamily construction is concentrated in just 12 metro areas. The most common type of construction is in the class A segment in the higher rent neighbourhoods, with asking rents increasing 4.6% last year and forecast to increase 3.4% this year.
"If the pace of rent increases continues to fall, this concentration could compound downward rent pressure on rents in those areas. Currently, however, the impact of new supply is relatively muted, as asking-rent gains remain strong and vacancy rates are still low (although increasing)," says Fitch.
There is additional risk for metro areas with exposure to oil and gas. Dallas and Houston both have large amounts of new multifamily construction, but have diversified their markets in the wake of past energy market crises, so far muting the impact of the current declines in the energy sector.
Meanwhile, new supply in the student housing subsector has reached record levels. In 2015 approximately 48,000 beds were delivered and a similar amount is forecast for this year.
"While individual properties have begun to exhibit performance deterioration due to occupancy declines, we expect overall student housing vacancies will hover around 2% for 2017. We have seen some properties with increased expenses, deferred maintenance and/or average rent declines," says Fitch.
The rating agency believes some of these pressures may be related to superior and newer properties entering their submarkets during the rise in construction, as well as declining enrolment at certain institutions. In the long term, the trend towards off-campus learning options may lower overall demand for student housing.
Multifamily vacancy rates have risen slightly but are forecast to remain benign. Fitch notes that the rate increased from 4.4% in 4Q15 to 4.5% in 1Q16.
News Round-up
Risk Management
State Street risk tool updated
State Street has teamed up with Northfield Information Services and Morningstar to enhance its truView risk management tool. The multi-asset, online platform will integrate Northfield's risk factor tools, including its risk factor decomposition offering.
The truView platform will specifically incorporate the 'Everything Everywhere' model and 'optimiser' risk analysis and portfolio allocation tool. The former calculates risk measures across all asset classes, public investment types and alternative investments for institutional investors. Northfield's database coverage includes over 500,000 fixed income securities, one million mortgage-backed pools, approximately 90,000 mutual funds and ETFs, and 300,000 CMOs and ABS.
State Street will also integrate Morningstar's data for more than 4,000 ETFs into its truView platform. It says that this will help its clients better capture ETF potential and allow them to model ETFs alongside other asset classes in risk and other analytics.
News Round-up
Risk Management
Risk model proposals criticised
The GFMA, ISDA, IACPM and JFMC have issued a joint response to the Basel Committee's consultation on reducing variation in credit risk weighted assets and the constraints on internal model approaches. The response warns that the proposals are the "most significant conceptual change to the capital framework since the advent of Basel 2" and would likely hurt the measurement and understanding of risk.
The statement particularly points out the organisations' concern with the removal of maintaining risk-sensitivity in the Committee's current proposal. This could distort capital allocation decisions and pricing to the detriment of banks' customers and the global economy. As a result, the statement says that a number of areas may be affected, including corporate lending and capital markets activity.
It also raises concerns that the cumulative effects of the current suite of Basel proposals are leading to increased risk-weighted-asset levels, which is reducing the marginal benefits for society. Therefore, it stresses that a comprehensive analysis is required to avoid disproportionate and unnecessary increases in capital requirements.
The organisations further suggest that the Basel consultation can still be achieved without restricting internal modelling in the manner proposed. This is in light of major investments on the part of both the industry and regulatory community that are under way to reduce unwarranted difference in modelled outcomes.
Among the recommended alternatives set out in the response is the associations' own suggestion for a constrained IRB approach for exposures to banks and other financial institutions. This would involve the probability of default and loss given default risk parameters to be set at regulatory prescribed levels.
"For exposures to corporates, where there is sufficient data, including pooled data, internal modelling approaches should be retained across the board," the statement adds. "The response also recommends that firms be allowed to continue modelling their specialised lending exposures when they can prove that they have the expertise and specialism required to structure and monitor these deals appropriately."
News Round-up
RMBS
RMBS downgraded on correction
Moody's has downgraded the rating of the Navigator Mortgage Finance No. 1 €10m class C notes from Ba1 to Ba2. The move reflects the correction of an assumption in the cashflow modelling for the Portuguese RMBS deal, as well as a reassessment of the mitigating factors in relation to counterparty risk.
In its last rating action on the deal in May, Moody's used an expected loss assumption of 6.09% in the cashflow modelling, instead of an updated assumption of 3.32%. The agency says it also underestimated the sensitivity of the class C tranche to the counterparty risk related to set-off and commingling.
Additionally, Moody's took into consideration in its analysis the updated assessment of the servicer and originator.
News Round-up
RMBS
Interest deferral supports Spanish RMBS
Performance among S&P-rated Spanish RMBS has improved over the past 24 months, with the agency's index for 4Q15 showing the lowest level of delinquencies since 1Q13. While a subset of 2006 and 2007 vintage transactions continue to show weak performance, interest-deferral trigger mechanisms are positively influencing the ratings on their senior notes.
As of 4Q15, severe delinquencies among 2006 and 2007 vintage loans peaked at 10% and 9% respectively. "In general, the weak performance of transactions featuring 2006 and 2007 vintage loans has led to downgrades across the capital structure, as weak performance erodes credit enhancement and liquidity support," comments S&P credit analyst Ibrahim Bundu-kamara.
He adds: "However, due to an accumulation of legacy defaults and delinquencies, transactions with interest-deferral mechanisms are seeing positive rating actions on the senior notes at the expense of the subordinated notes. This is because of the way in which our credit and cashflow stresses trigger the reprioritisation of the combined interest and principal repayment waterfall."
The agency's recent rating action on BBVA RMBS 2 exemplifies how interest-deferral trigger mechanisms can positively influence the ratings on senior notes, despite poor asset performance. It raised the ratings on the class A2, A3 and A4 notes in January because the notes benefited from class B interest-deferral triggers, together with the upgrade of Spain in October 2015.
As of April, 91% of S&P-rated Spanish RMBS transactions featured some form of interest-deferral mechanism. When the mechanism is triggered, funds can be diverted to pay the interest-deferral principal on the senior class of notes before the interest on the subordinated notes. Cumulative default triggers - which tend to feature in issuances after 2005 - are the most common triggers, representing 53% of all transactions, whereas older transactions tend to use the principal deficiency trigger mechanism.
News Round-up
RMBS
Single-tranche Russian RMBS debuts
VTB Capital has completed the first-ever single-tranche Russian RMBS, sponsored by Metallinvestbank. The RUB3.28bn deal offers a 10.25% coupon and will allow the bank to further develop its mortgage business.
VTB says that a number of innovative features were used in the issue, such as the excess mortgage collateral, reserve funds and issuer's expenses being funded by a loan from Metallinvestbank. This allowed VTB to avoid issuing junior notes and optimise the use of capital for the sponsor.
Another solution specific to the transaction was the price-based rather than coupon-based book-building process and placement of the notes, which provided additional flexibility to adapt to a fast-changing market environment and investor demand. The yield at the time of the placement equated to an approximate spread of 145bp over the Russian OFZ curve, which is unprecedentedly narrow for the Russian RMBS market.
Credit support for the senior note is provided by the Agency for Housing Mortgage Lending guarantee, overcollateralisation in the amount of over RUB460m and reserve funds.
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