Contents

ABS

CDQ development

Originator consolidation to drive issuance up?

The €1.47bn Towers CQ transaction, which closed last month, is the first Italian salary assignment loan ABS to be publicly placed in over a year. However, originator consolidation could spur increased volumes in the sector going forward.

The Cessione del Quinto (CDQ)/Delegazione di Pagamento (DP) business was historically considered 'street' lending and run outside of banks. But, through the intervention of the Bank of Italy, it is becoming increasingly more institutionalised. For instance, the central bank recently introduced even more stringent criteria for intermediaries, requiring them to hold at least €2m in capital and implement robust governance structures.

Before the financial crisis, a handful of investment banks - including Barclays, Deutsche Bank and Merrill Lynch - acquired CDQ originators or financed new origination, with differing levels of success. Most originators now are part of a banking group or are specialist lenders, such as IBL Banca.

Francesco Cilloni, partner at Phinance Partners, suggests that the market is currently moving into its third phase, where it is diverging between bigger players - that underwrite on-balance sheet and broker for others on a white label basis - and smaller players, which broker or sell other firms' products. Against this backdrop, M&A deals are increasing, with the aim of securing the production of assets.

For example, Oaktree Capital has acquired an Italian banking license and is currently closing the acquisition of Sigla Credit. Other players are increasing their share in CDQ lenders or establishing partnerships, or acquiring platforms/portfolios. Veneto Banca and Popolare di Vicenza reportedly have put their CDQ businesses up for sale, while Barclays Italy is rumoured to be trying to offload its portfolio.

"We expect to see this activity increase and potentially lead to more securitisations, depending on the strategy of the new owners," Cilloni observes.

CDQ funding strategies currently include: repo with the ECB; repo with a bank conduit; or a public securitisation. Indeed, the assets are a good fit for both securitisation structuring and hedge fund returns, as the underlying is highly leverageable.

CDQ are standardised assets: they generally all have 10-year tenors and are fixed rate, with a cap on the amount a person can borrow of one-fifth of their net salary paid as monthly instalments. They are also secure because the sector is heavily regulated and covered by insurance for unemployment and death, while the asset is a core obligation of the employer, which deducts repayments at source.

However, one complication is that new origination is mingled with the refinancing of old loans within a portfolio. So, if an origination platform is in run-off or the intermediary agents aren't committed, loans can be refinanced after around four years.

"Since CDQ loans are skewed towards upfront commission, in the past, agents were offering to refinance borrowers at a lower rate after only a year, but demanding more commission upfront," explains Cilloni. "Now there is more transparency around what commission is paid upfront and borrowers receive a pro-rata refund of the insurance premium and other commissions if they prepay."

New originations in the CDQ market average €5.5bn a year and there is plenty of competition to refinance the loans. Consequently, if an agent or originator is not properly incentivised, portfolios can leak principal/excess spread from prepayments.

Biagio Giacalone, head of the credit solutions group at Banca IMI, notes that - except for the quality of origination - prepayment is the greatest risk that investors, especially junior noteholders, may suffer. "The phenomenon of prepayment is particularly important for CDQ assets, because borrowers often prepay their loans to refinance them with a new CDQ. The latter may happen, as provided by law, only after two-fifths of the loan's original term has passed. After two-fifths of the loans have elapsed, usually prepayment rate can increase significantly, according to specific features of the portfolio."

Cilloni says that this unique feature of the market means that the return of CDQ securitisations depends on how the CPR is priced. CPRs run between 7%-10%, but can increase to around 15% and higher (up to 20%) if a portfolio is in run-off.

"The unlevered yield is between 4%-6%, but it's relatively easy to achieve a 12%-17% return, providing the CPR is priced correctly," he confirms.

In terms of pricing CPR, Cilloni recommends analysing the history and incentives of agents as to the aggressiveness of refinancings and the alpha of the originator. Other aspects that are crucial to understand include: how an originator is managed and funded; whether their volumes are growing or decreasing; the vintage of the portfolio; and how much excess spread is guaranteed.

With respect to the recent Towers CQ deal (see box), simulations showed that a CPR of 7.5% reflects both lower prepayments occurring before the two-fifths term has expired and a higher CPR registered once the two-fifths term has elapsed, according to Giacalone.

Cilloni says that the paucity of public CDQ deals to date is because most originators were within banks and therefore preferred to retain the junior piece, while independent originators are typically small and so it's rare for them to accumulate a portfolio large enough to securitise. "To fund the junior tranche, it's necessary to have a warehouse, where you invest little by little over 12-18 months and suffer small returns in the meantime. Ideally, a portfolio materialises with the desired characteristics and it's possible to secure cheap financing and lock in a decent IRR."

He adds that it's a price-takers' market. "Hedge fund money needs to make significantly sized investments and has limited flexibility in terms of remaining at lower returns. At the same time, smaller originators don't want to lock yield in at too high a level, so it has proved very difficult to structure and execute a transaction."

In addition, because other yielding assets are drying up, a few banks began throwing cheap money at the asset class. Many Italian banks with balance sheets are also actively financing the senior pieces on a private basis.

One indication of how expensive leverage is at present is that Consum.it's Arianna SPV deal from 2013 is generically trading close to 200bp over, having traded close to 130bp-140bp about 18 months ago. "If spreads return to this lower level, it could facilitate more securitisation activity," Cilloni observes.

Looking ahead, the development of the CDQ market is expected to be led by pensioner demand for loans, as this borrower segment remains untapped. Increasing private sector participation is also possible, although the assets are somewhat riskier because borrowers change jobs and get laid off more often. Portfolios currently comprise around 80%/20% public/private sector borrowers.

CS

NPLs

Fragile China

NPL deals expose country's wider debt issues

Non-performing loan securitisations ended an eight-year hiatus in China in late May when Bank of China (BOC) and China Merchants Bank (CMB) both issued new deals. Both transactions have been deemed a success by market participants, but also highlight profound, underlying fears around the economy's exposure to poor quality loans.

Chinese authorities have this year amped up their push towards a fully-fledged NPL securitisation sector as they seek to address the large number of bad loans believed to be plaguing Chinese banks' balance sheets. The National Association of Financial Market Institutional Investors took a big step forward in this initiative when it set out proposed guidelines for a NPL framework just three months ago (SCI 7 April).

This was swiftly followed by the BOC and CMB transactions, the first of their kind since the financial crisis. At a combined RMB534m, the deals kick-started a government pilot programme that is seeking to facilitate up to RMB50bn worth of NPL securitisations through six chosen banks - the other four of which are Agricultural Bank of China, Bank of Communications, China Construction Bank and Industrial and Commercial Bank of China.

"The idea around NPL securitisations took some criticism, but these deals have shown some big positives," says Jonathan Rochford, portfolio manager at Narrow Road Capital. "The concept of them is that they help clean up some of these bad loans, but the evidence has also critically shown that the process has been tested and can work."

He notes that the breaking up, pricing and transferring of the risk entailed within the NPLs has been a smooth process. These loans were marked down by the selling banks, reducing the book value of the assets and equity on their balance sheets as a result, and forcing the banks to realise losses.

"The loans were marked down to what looks like a fair value," adds Rochford. "This sets a precedent for valuing assets going forward and gives other banks a stronger mandate to offload their NPLs. The downside is that the NPL approach is costly, as the provisions have clearly been insufficient."

The recovery rates on the loans could be a cause for alarm, particularly in the BOC deal, where the loans were marked down to 24% before being transferred into the securitisation structure. This placed the rates slightly below even the average among senior unsecured bonds.

"It's a pretty awful recovery rate for senior secured loans, especially when you look at it relatively," says Rochford. "Bank loans usually have a recovery rate around 50 to 80 cents on the dollar. If these figures hold true as indicators for future deals, then the potential losses could stop other banks from marking down their loans."

However, he warns that the prices may not necessarily be a strong gauge for other upcoming deals, in part because the loans were sourced from the province of Shandong - a major steel-producing region. The steel industry is known for having overcapacity issues and resultant low recoveries.

Rochford explains that poor recovery rates often surface in Western countries after financial crises - such as in Spain and Ireland - or when industries being to struggle like the US oil & gas sector earlier this year. "It's a small sample to run on and it may just be a case of the industry and geography instigating artificially low recoveries uniquely for these deals," he says.

However, the mark-downs may have left open the door for buyers to make a profit, with Rochford noting that the triple-A senior notes from both deals attracted significant interest from bank investors, while asset managers targeted the junior tranches. "It will be interesting to see what demand is like when the next deals come around, but these are relatively small to begin with," he explains. "There's been talk of a lot more to come. When talking about potential sizes though, they are still just a drop in the ocean relative to the bad loans spread throughout the banking and shadow banking sectors."

Still, the deals have highlighted the more systemic issue surrounding NPLs within the Chinese banking sector. The China Banking Regulatory Commission recently said that the ratio of non-performing debt stood at 1.81% in the economy, up from 1.75% at the end of March. However, this number has been widely disputed, with some suggesting that NPLs comprise as much as 20% of loans.

Separate official figures for March put Chinese NPLs at US$211bn, equating to 0.61% of total bank assets. Based on this figure, Rochford says that applying an indicative recovery rate of 24% from the first two deals would imply losses of US$156bn. Nonetheless, regardless of how many NPLs are actually on the banks' books, potentially enormous losses could overwhelm the US$2.6trn of their core equity and leave the country's authorities in a dilemma.

"This leaves the Chinese government with a tricky situation of deciding whether to recapitalise its banking system and, if so, when?" he concludes.

JA

Structured Finance

Volume growing

ABS issuance heading up Down Under

Australian primary ABS issuance has climbed steadily since 2008 - with a brief dip in 2012, when banks favoured covered bond issuance - and despite a slow start to 2016, this year is also expected to yield a healthy total. Full-year volume is predicted to reach A$20bn, with even more issuance likely in the future as the regulatory environment settles down and Australian master trusts potentially make their debut.

New issue securitisations so far this year have generally played it safe, although Resimac did issue a US dollar-denominated tranche in April (see SCI's new issue database). There have also been certain other structural innovations, such as for the A$260m Flexi ABS Trust 2016-1 deal, which is the first to include a green bond tranche (SCI 25 April).

Overall, however, investors continue to favour vanilla structures. There is interest in increasing foreign currency issuance - which is tough to do without the introduction of master trusts - but the main focus for the market is on solid underwriting.

"Fundamentally, Australian RMBS is viewed favourably by investors. There are some investor concerns about the economy, but demand for RMBS has remained pretty strong. As long as loans are well underwritten, a geographically diverse pool will perform well over time," says Peter Casey, deputy treasurer at ING.

ASIC and APRA have both been focused on underwriting standards. That has made portfolios quite conservative and homogenous, but Casey notes that it is better to be safe than sorry.

"Serviceability testing is absolutely key to underwriting. Unemployment has remained low and interest rates are historically low, so households should not be experiencing stress," says Casey. "That said, we agree with APRA that now is not the time to get complacent. We want to focus on writing good loans, so that we can withstand any downturn that comes."

Later this year, APRA will update its prudential framework for securitisation, with the market anticipating the reintroduction of date-based calls - which Casey believes would be helpful in taking out extension risk. However, the more significant development would be the introduction of master trusts, which would make it easier to issue foreign currency bonds and therefore increase the investor base for Australian securitisation.

Patrick Lowden, partner at Herbert Smith Freehills, comments: "We are still waiting for APRA to release the final standard, but master trusts are not expected to be eligible for capital relief - which, under the current draft standard, would mean ADI-originated structures could have no more than two credit tranches of notes with only a single maturity of subordinated notes. However, we expect the master trust structure to be popular both for mortgages and for other ABS, such as credit card receivables securitisations."

Another significant regulatory development potentially affecting the Australian market is happening on the other side of the world. The EU's endorsement of simple, transparent and standardised (STS) securitisation has buoyed market participants in the northern hemisphere, but whether Australian issuers will be allowed to use the STS label is far from clear.

"Proposals before the European Parliament would require the originator and the issuer to be established in the EU," notes Lowden. "Key submissions in favour of allowing non-EU issuer/originator structures to qualify as STS come with the condition that the issuer and originator must be subject to an equivalent regulatory regime. There are a number of differences between the Australian and EU approaches to regulation of securitisation, such as the absence of risk retention requirements, so it is not clear that Australia would meet this requirement."

The Resimac deal that included a US dollar tranche was RESIMAC Triomphe Trust - RESIMAC Premier Series 2016-1, which priced its US$265m A1 notes at 139bp over Libor. Mary Ploughman, securitisation executive director at Resimac, says the mortgage lender's business model is wholly reliant on securitisation for medium-term financing.

"The best way to issue as broadly as possible is in Australian dollars, but we have also established a 144A programme to attract US investors, which has successfully broadened our investor base," says Ploughman. "We would like to diversify in euros and sterling. For that to work, you need to swap cashflows back and the cost of the swap has been a big impediment."

She adds: "What will really help us is if the master trust structure makes major banks issue on a more global basis because that will get investors more familiar with Australia. If you are one of only two or three issuers doing the legwork of educating foreign investors, then that is a lot of work for you to do."

The concept of Australian master trust issuance has been around for some time (SCI 27 September 2013). While the regulators have taken their time acting, it is clear that there is appetite from Australian issuers - and very probably from foreign investors too.

JL

Secondary markets

Euro CLOs sporadic

Activity in the European CLO secondary market is sporadic in terms of volume and types of participant.

"Activity is fairly strong, but it feels dealer led," says one trader. "2.0s are changing hands at quite high levels and seems like they will tighten further - so dealers are trying to get ahead of the market and position themselves now."

However, the trader adds: "Overall, activity is still a bit sporadic and can be lacklustre at times. Primary is getting printed so there's clearly demand from end-accounts but there's no real continuity of demand from them in secondary at the moment."

The parts of the stack in focus are similarly sporadic, the trader notes. "Activity was very strong last week around deep mezz, but triple-A buyers are now emerging. Triple- and double-Bs remain the hardest pieces to place."

BWIC activity is also patchy. "It was very busy in BWIC terms last week, but dead the week before," says the trader. "It's started quiet this week, but looks to be picking up again today. For the most part sellers have been traditional primary buyers, so could just be freeing up capital, but equally some selling could be a result of redemptions from gated funds."

There are currently four BWICs on the European CLO schedule for today so far. The chunkiest is a five line mix of equity, single- and triple-Bs due at 14:30 London time.

The €21.85+m current face list comprises: AVOCA VII-X F, BACCH 2007-1 D, LFE III D, PROPO II-X E1 and WODST V-A D. None of the bonds has covered with a price on PriceABS in the past three months.

Secondary markets

US CMBS supply surges

The US CMBS market came to life last week, as a high volume of bid-list paper made the rounds. Activity is expected to remain healthy this week.

"BWIC volume came close to US$4bn last week for investment grade paper alone, with another US$1.5bn or so of below-investment grade paper. Typically we have been seeing around US$2.5bn of investment grade per week, so it was a big rise," says one trader.

The trader believes that the surge in secondary market activity - which saw triple-Bs in particular tighten in - was largely driven by primary market activity. New issues priced tighter than had been expected.

"Wells Fargo had a deal which was whispered at 120bp, before guidance was given at 118bp and then it priced at 115bp. Things have just been getting tighter and tighter. There was also a Citi deal which had guidance at 122bp and priced at 118bp," says the trader.

He continues: "A lot of sellers saw the opportunity last week to sell with tight spreads, while a lot of buyers started to worry about missing out before spreads got too tight, so they were eager to buy. Sentiment has improved noticeably along with the increase in volume, although there now seems to be a shortage of willing sellers."

The trader notes that there was also a further US$3bn of agency CMBS. This also followed tight primary issuance.

Secondary markets

Euro secondary firm

Spreads across the European securitisation secondary market are remaining firm.

Wider market positivity is feeding in to European ABS/MBS and generating improving market sentiment. While activity remains sporadic with volumes varying significantly from session to session spreads are flat to slightly tighter across the board this week so far.

In CLOs, limited supply is continuing to support spreads across the capital structure. Mezz paper remains the principle focus with some points edging in on the week, but the top and the bottom of the stack are unchanged since Monday.

There are four BWICs on the European schedule for today so far. The largest is a seven line CDO/CLO auction due at 15:00 London time.

The €22m list comprises: AYTDS 2006-1 B, AVOCA 12X F, BACCH 2007-1 D, BLACK 2015-1X E, JUBIL IV-X D1, WODST I D1 and WODST V-X E1. Only BACCH 2007-1 D has covered on PriceABS in the past three months - at 86.58 on 19 July.

Secondary markets

US CLOs rolling on

The US CLO secondary market is maintaining its momentum, particularly in the middle of the stack.

"It's been a very fast, one-way express since Brexit," says one trader. "The rally has been particularly strong in mezzanine."

Spreads among short-dated, top tier mezz names have benefitted the most from the positive sentiment, the trader adds. "Double-Bs have spiked, and we are seeing 2012 short names hitting around 625- 650, while the 2014 to 2015 names are getting as low as 730. At the same time, better manager triple-Bs have also broken 400."

These levels are expected to hold firm in the near future, but they are also raising some questions. "A lot of pieces are changing hands between dealers after they were picked up on BWICs, which does add a little doubt as to whether the rally is being entirely run on real money," the trader says.

There are five BWICs on the US CLO calendar so far today. The last remaining list is a single $3.45m piece of CIFC 2015-2X INC due at 15:00 New York time, which has not covered with a price on PriceABS.

Structured Finance

SCI Start the Week - 18 July

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

Pipeline
Last week's pipeline additions included a decent mix of MBS names. In the end there were six new ABS, three RMBS, three CMBS and two CLOs added.

The ABS were: €700m BBVA Consumo 8; US$318.5m CPS Auto Receivables Trust 2016-C; US$785m Ford Credit Floorplan Master Owner Trust A Series 2016-3; US$156.863m Ford Credit Floorplan Master Owner Trust A Series 2016-4; US$775m John Deere Owner Trust 2016-B; and US$184.9m Marlette Funding Trust 2016-1.

US$2.645bn Chase Mortgage Trust 2016-2, Fortified Trust Series 2016-1 and US$350m Freddie Mac Whole Loan Securities Trust Series 2016-SC01 accounted for the RMBS, while the CMBS were US$200m B2R Mortgage Trust 2016-1, US$721.2m CGCMT 2016-P4 and US$1bn WFCM 2016-C35. The CLOs were €412m Griffith Park CLO and €414m Jubilee CLO 2016-XVII.

Pricings
A relatively long list of deals priced last week. There were 10 ABS prints as well as an ILS, two RMBS, a CMBS and two CLOs.

The ABS were: US$1.25bn BMW Vehicle Owner Trust 2016-A; US$755m Capital Auto Receivables Asset Trust 2016-2; US$1.25bn CarMax Auto Owner Trust 2016-3; US$909m Dell Equipment Finance Trust 2016-1; US$1bn Enterprise Fleet Financing Series 2016-2; US$700m OneMain Direct Auto Receivables Trust 2016-1; US$375m Sierra Timeshare 2016-2 Receivables Funding; US$607m SMB Private Education Loan Trust 2016-B; US$1.08n Verizon Owner Trust 2016-1; and US$986.73m World Omni Automobile Lease Securitization Trust 2016-A.

US$225m Blue Halo Re Series 2016-2 was the ILS, while CNY3.8bn Jiamei 2016-1 and US$657m Progress Residential 2016-SFR1 were the RMBS. The CMBS was US$430m Waldorf Astoria Boca Raton Trust 2016-BOCA and the CLOs were US$408m Annisa CLO 2016-2 and US$723m Sound Point CLO 2016-2.

Markets
US CLO secondary market activity started the week strongly and continued in that vein, as SCI reported on Thursday (SCI 14 July). "The last few days have been the busiest that I've experienced since the UK's EU referendum vote," says one trader.

The European ABS, RMBS, CMBS and CLO secondary markets started last week with light flows, as SCI reported (SCI 12 July). CLOs were leading the way in terms of both activity and tightening across the capital structure.

Editor's picks
Financial worries: The UK's vote to leave the EU has ignited debate as to what deal the British government will carve out for its financial services industry, including the derivatives market. The need for counterparties to retain their passporting rights suggests that some harmonisation with EU regulations is the most likely scenario...
Reputation management: Side pockets are a portfolio management tool that can benefit both investors and managers alike. But having fallen from grace in the wake of the financial crisis, it is debatable whether they can regain their reputation as a viable liquidity management resource...
Step-up tranches refinanced: Four US CLOs - ACAS CLO 2013-2, Carlyle Global Market Strategies CLO 2014-3 and Neuberger Berman CLO XII and XVI - have been refinanced over the last two weeks. None of the refinancings were plain vanilla, with three having been driven by the desire to refinance step-up tranches...

Deal news
• Moody's has confirmed its rating of Ba3 on the class C notes issued by the Prosper-loan backed Citi Held for Asset Issuance (CHAI) 2015-PM1, 2015-PM2 and 2015-PM3 ABS deals. The rating agency had placed the notes on review for downgrade earlier this year due to concerns over an up-tick in delinquencies.
• Progress Residential plans to prepay the US$465.9m loan that serves as collateral for the Progress 2014-SFR1 securitisation, with the deal becoming the first single-asset single-family rental transaction to pay off in full as a result. The prepayment will be funded by a portion of the proceeds from the US$462.7m Progress 2016-SFR1 transaction that is currently marketing.
• Fitch has upgraded the Bosphorus Series 2015-A, 2015-B, 2015-C and 2015-D notes, as well as the Bosphorus Series 2012-B, 2012-C and 2012-D notes from triple-B plus to single-A minus. The upgrades are a result of originator Finansbank's ownership change.
• All membership interests in the DivCore CLO 2013-1 CRE CDO, together with the issuer's ordinary and preferred shares are set to be transferred from DivCore Sub Debt Club I REIT Holding to a newly established entity, LoanCore Capital Credit REIT (LCC REIT). Moody's notes that the move will not cause it to downgrade or withdraw its ratings on the notes.
• A second successor collateral manager has been rejected by Gramercy Real Estate CDO 2007-1 noteholders. The controlling class had directed the issuer to appoint C-III Investment Management as successor manager (SCI 23 June), but sufficient objections to the appointment were received and certain collateral management agreement conditions weren't satisfied.
• An auction date of 21 July has been scheduled to settle CDS trades referencing Portugal Telecom International Finance. The unanimous decision by the 15-member ISDA Determinations Committee comes after it was agreed earlier this month that a bankruptcy credit event occurred in connection with the company (SCI 4 July). ISDA has identified an initial list of seven euro-denominated bonds as deliverable obligations, with a final list set to be published by the trade association on 18 July.

Regulatory update
• The Basel Committee has scaled down the risk weights for 'simple, transparent and comparable' (STC) securitisations and reduced the risk-weight floor for senior exposures from 15% to 10%. The move had largely been expected and, in general, is viewed as catching up with European proposals for the STS securitisation framework.
• ISDA has launched a new protocol to help market participants meet the EU Bank Recovery and Resolution Directive (BRRD) requirement. The ISDA 2016 Bail-in Article 55 BRRD Protocol will allow Dutch, French, German, Irish, Italian, Luxembourg, Spanish and UK entities to meet the requirements of Article 55 of BRRD.
• The US SEC has adopted amendments and guidance related to rules regarding the regulatory reporting and public dissemination of security-based swap transactions. The new Regulation SBSR rules and guidance are designed to increase transparency.
• ESMA has published a consultation paper proposing to change the phase-in period for central clearing of OTC derivatives applicable to financial counterparties with a limited volume of derivatives activity under EMIR. The authority proposes to amend EMIR's Delegated Regulations on the clearing obligation to prolong, by two years, the phase-in for Category 3 financial counterparties.
• The US Fed has extended the conformance period for the Volcker Rule to 21 July 2017. While the extension was largely anticipated by market participants, the timing was later than most expected, coming only two weeks before the previous extension date expires on 21 July 2016.

Deals added to the SCI New Issuance database last week:
ACAS CLO 2013-2 (refinancing); Accunia European CLO I; Astrea III; BBSG 2016-MRP; Carlyle Global Market Strategies 2014-3 (refinancing); Cherrywood SB Commercial Mortgage Loan Trust 2016-1; CVC Cordatus Loan Fund VII; Driver Australia Master Trust series 2016-1; Driver China Four Trust; Driver UK Master Compartment 2 series 2016-1; Driver UK Master Compartment 2 series 2016-2; Evergreen Credit Card Trust Series 2016-2; FREMF 2016-KF18; FRESB 2016-SB18; Galaxy XXII CLO; JFIN CLO 2016; Jiamei 2016-1; JP Morgan Mortgage Trust 2016-1; JPMCC 2016-JP2; JSC Mortgage Agent BFCO; LSTAR 2016-4; Master Credit Card Trust II series 2016-3; Monroe Capital MML CLO 2016-1; Nationstar HECM Loan Trust 2016-2; Neuberger Berman CLO XII (refinancing); Purple Storm 2016; Rongteng 2016-2; SGCMS 2016-C5; SHOPS 2016-CSTL; Tax Ease Funding 2016-1; Top Commercial Auto I

Deals added to the SCI CMBS Loan Events database last week:
BACM 2005-5; BACM 2007-3 & JPMCC 2007-LD11; BSCMS 2006-PW11; CD 2006-CD3; CGCMT 2008-C7; COMM 2006-C8; COMM 2014-LC15 & COMM 2014-UBS2; CSMC 2007-C1; DECO 2007-E5; DECO 2014-GNDL; DECO 2015-HRP; EPIC DRUM; EURO 19; EURO 23; EURO 26; GCCFC 2007-GG9; GSMS 2004-GG2; GSMS 2007-GG10; INFIN CLAS; JPMCC 2006-CB16; JPMCC 2007-LDP10; LEMES 2006-1; MLCFC 2007-7; MSC 2006-HQ9; MSC 2006-T21 & BSCMS 2006-PW11; MSC 2007-IQ16 & BSCMS 2007-T28; NEMUS 2006-2; TITN 2007-CT1; TMAN 7; WBCMT 2006-C25; WBCMT 2007-C32; WFCM 2015-C26

CMBS

Ralph Lauren exposure gauged

Ralph Lauren last month announced plans to restructure, including the closure of about 50 of its retail locations. The firm has not yet disclosed which stores will be affected, but Morningstar Credit Ratings has identified 30 US CMBS loans - with an allocated balance of US$1.44bn - with exposure to Ralph Lauren brands.

The firm's retail space totals more than 20% of the gross leasable area in two loans, while occupancy for six loans would drop to 80% or below if Ralph Lauren or an affiliate were to vacate, according to Morningstar. Offsetting the risk is the relatively healthy status of these loans: all are current and none has a DSCR below break-even.

In addition, only seven of the loans have leases expiring in the next two years. Although six loans are set to mature by end-2017, the remaining 24 loans will not mature until after 2020, which should provide enough time to re-lease if Ralph Lauren vacates.

The firm operates 493 stores directly, including Ralph Lauren, Club Monaco and Polo factory stores. CMBS loans have the most exposure to the factory stores, with 17 stores (representing 74.4% of Ralph Lauren's total GLA in CMBS) in outlet malls. The remaining retail exposure is across six Ralph Lauren stores, one Club Monaco and one showroom.

Morningstar notes that Ralph Lauren was the largest tenant at the Mammoth Luxury Outlets loan, securitised in MSBAM 2015-C21, comprising 16.8% of the GLA. The firm vacated the property after its lease expired at end-May, with occupancy dropping to 57.2% as a result.

"The loan had already been at an elevated risk, with a DSCR of 1.16x, as of 31 March 2016. However, Ralph Lauren's potential vacancy was taken into account when the loan was unwritten and it was structured with tenant improvements and leasing commissions to cover the costs of re-leasing the space," the agency observes.

Morningstar also points to some risk in the previously specially-serviced Chevy Chase Center loan, although Ralph Lauren accounts for only 4% of the GLA. The US$81.4m loan, securitised in LBUBS 2008-C1, was transferred to the special servicer in May 2015 and returned to the master servicer in October.

According to the borrower, it is likely that several retail tenants will not be renewing over the next few years, and the vacancies will create significant cashflow problems in the near future. If Ralph Lauren vacates at the end of its lease in January 2018, the occupancy would decline to 88%.

Finally, the US$35m 109 Prince Street loan - securitised in JPMCC 2014-C20 - is 74.2% occupied by Ralph Lauren and occupancy would decline to 25.8%, should the firm vacate. However, Morningstar believes the property's prime location in SoHo, New York, minimises the risk of the tenant vacating prior to its January 2026 lease expiration.

Manhattan locations - including flagship stores and a showroom - account for 10.8% of total CMBS exposure to the firm.

CS

Structured Finance

Investment chief replaced

Peter Schmidt-Fellner is retiring as cio and a director of NewStar Financial, but will remain involved with the firm as an external advisor to its investment committee and risk policy committee. He was a founding member of the firm and has held the role of cio since NewStar's inception in 2004. The board will be reduced in size by one to seven members as a result of his retirement.

NewStar chief credit officer Dan McCready will succeed Schmidt-Fellner as cio and assume his role on the firm's investment committee. Since joining NewStar in March 2013, McCready has led the firm's leveraged finance credit team and played a key role in all related credit decisions.

He has more than 30 years of experience in leveraged finance and joined NewStar from CIT Corporate Finance, where he was chief credit officer. Prior to that, McCready held senior positions at GE Capital, CIBC World Capital Markets, Bankers Trust Company and Bank of America.

Structured Finance

Sales and trading head tapped

Mizuho Americas has brought in Thomas Hartnett as senior md and head of fixed income sales and trading. In this role, Hartnett will lead Mizuho's US execution and distribution capabilities for clients across all fixed income asset classes, including securitised products, high yield credit, investment grade and emerging markets.

He will also be tasked with driving product initiatives deemed critical to further enhancing Mizuho's growing US business, reporting to Jerry Rizzieri, president and ceo of Mizuho Securities USA. Prior to joining Mizuho, Hartnett held various senior positions at Deutsche Bank, covering areas that included derivatives, cash rate products, municipal capital markets and corporate bonds.

Structured Finance

Alternative investment firm reshuffles

Kayne Anderson Capital Advisors has appointed Mike Levitt as ceo, effective immediately. It has also promoted Bob Sinnott from president and ceo to co-chairman, alongside founder Ric Kayne.

Levitt will be based in Los Angeles and will join Sinnott and Kayne as part of the firm's executive management team. He was previously at Apollo Credit Management and founded alternative investment management firm Stone Tower, where he was ceo.

Structured Finance

Commercial ABS team boosted

KBRA has hired Xilun Chen to the role of senior director within its commercial ABS group, reporting to Anthony Nocera, md and head of Commercial ABS. Chen's focus will include contributions to the rating of whole business securitisations, aviation, container, PACE, solar and other transportation leasing assets. 

Chen joins from S&P, where he focused on various esoteric ABS assets. Prior to that, he was a senior manager at Morgan Stanley, providing valuation of CDS and correlation products. He has also held roles at Harding Advisory, BlueMountain Capital Management, Ambac and JPMorgan.

Structured Finance

Tortoise assists management buyout

Tortoise Credit Strategies has assisted key Bradford & Marzec employees in completing a management buyout and has been confirmed as the successor manager of B&M CLO 2014-1. The investment decision process and core investment team at Bradford & Marzec will remain the same.

Bradford & Marzec employees and management now own around 37% of the firm, with Tortoise investments holding the remainder. Founders Ted Bradford and Zelda Marzec have exited their equity positions, but will remain employees of the firm to ensure a smooth transition.

Structured Finance

Transaction head hired

CBRE has recruited Vishnu Reddy as a senior director and head of transaction management within its capital advisors' debt and structured finance team. In the role, Reddy will focus on coordinating deal execution, as well as utilising previous experience to provide a legal function for supporting clients. He joins from BNP Paribas, where he was a real estate loan portfolio manager and structurer.

Structured Finance

Structured products team moves

K&L Gates has opened a new office in Munich and appointed a team from King & Wood Mallesons to staff it. The team will be led by Hilger von Livonius and also includes Philipp Riedle and Michael Harris. Von Livonius has around 20 years of experience and concentrates his practice on banking, capital markets, asset management and regulatory matters, with a particular focus on structured products.

Insurance-linked securities

ILS lawyer to lead expansion

Berkshire Hathaway Specialty Insurance (BHSI) has expanded into transactional liability insurance in the US and Canada. In connection with the move, the firm has named Robert Underhill as svp, head of transactional liability based in New York. It has also appointed Dan Crosby as vp, transactional liability, and Amy Bowman and Michael Brooks as avps.

BHSI will underwrite representations and warranties insurance and other coverages for the risks and uncertainties in corporate transactions. Both primary and excess coverage is available.

Underhill joins BHSI with over 15 years of experience in the financial and insurance industries. He was most recently a partner at Locke Lord, where he focused on insurance M&A, ILS, reinsurance and other insurance transactional and regulatory matters. He also held executive roles focused on insurance-related risks at Fortress Investment Group, Credit Suisse and AIG.

Crosby was most recently vp and underwriting leader, transactional liability, at QBE Americas. Before that, he had over 10 years of experience as an M&A associate at several law firms, including most recently DLA Piper. He is also based in BHSI's New York office.

Bowman joined BHSI as counsel in the legal department in 2014, after serving in various legal roles at AIG for more than seven years. She began her career as a securities associate with Bressler, Amery, & Ross. She is based in BHSI's Boston office.

Brooks was most recently an associate at Kramer Levin Naftalis & Frankel, where he had over 10 years of corporate M&A experience. He is based in New York.

Insurance-linked securities

ILS lawyer joins Chicago office

Drinker Biddle & Reath has appointed a new member to its corporate and securities group. The law firm has added structured insurance specialist Jay Kallas to its Chicago office.

Kallas has more than 15 years of experience and was most recently corporate counsel for Allstate in its investments and business transactions department. While at Allstate, one of his key areas of focus was catastrophe bonds. Kallas has also worked at Locke Lord and at Dewey & LeBoeuf.

Risk Management

OTC clearing head named

Hong Kong Exchanges and Clearing (HKEX) has appointed Jacky Mak as md, head of OTC clearing. He will be in charge of business development and operations of OTC Clearing Hong Kong (OTC Clear), a subsidiary of HKEX, reporting to HKEX's head of clearing Calvin Tai.

Mak succeeds Kelvin Lee, who has retired after more than 25 years of service with HKEX and Hong Kong Securities Clearing Company, before it became a subsidiary of HKEX. Mak has more than 20 years of experience in financial services and consulting.

His roles have included cfo of the Hong Kong and Taiwan branch of Societe Generale and director, OTC product development of HSBC in Hong Kong. Before joining HKEX, he was a Hong Kong-based director in Bank of America Merrill Lynch's global markets division.

RMBS

Aussie merger agreed

Homeloans has entered into a scheme implementation agreement (SIA) with RESIMAC, which provides for the implementation of a merger between the two Australian mortgage lenders and securitisers. Under the transaction, RESIMAC shareholders will receive all scrip consideration, through the issue of 285,380,042 new ordinary Homeloans shares. It is expected that upon completion, existing RESIMAC shareholders will hold 72.5% of the merged group and existing Homeloans shareholders will hold the remainder.

Homeloans says that there is a strong commercial and strategic rationale for the proposed merger. Specifically, its board believes that the transaction will provide Homeloans with: greater scale and expertise; improved growth opportunities; enhanced access to the RMBS market; and a broader distribution platform for mortgage and other products. The merged group will create a non-bank lending and distribution business in Australia and New Zealand with a loan portfolio exceeding A$13bn.

The board of the merged group will consist of two directors appointed by Homeloans and three directors appointed by RESIMAC. A new independent chairman will be appointed soon after completion.

Warren McLeland, RESIMAC's existing ceo, will be appointed md of the merged group. Scott McWilliam and Mary Ploughman will be appointed joint deputy mds. Ploughman is currently an executive director at RESIMAC and leads its securitisation activities, in addition to managing the New Zealand business and inorganic growth.

ABS

PACE insurance gets green light

The US FHA says it will now insure mortgages on certain properties that are subject to PACE assessments. The move is a boon to this growing sector of the US ABS market, which has already hit the billion dollar mark through a number of new deals this year (SCI passim).

Under new guidelines, the FHA has agreed to approve purchase and refinance mortgage applications in states that treat PACE obligations as special assessments similar to property taxes. The government agency says this is part of an attempt to expand US homeowner access to clean energy. Specifically, the guidelines help to address situations where PACE obligations do not receive priority or prime status over the FHA mortgage lien.

Current law prohibits the FHA from accepting a first lien PACE structure. However, in accordance with existing guidance, lenders can meet insurance standards if they are responsible for escrowing PACE payments as they would property taxes. This circumstance would leave the FHA immune from the risk of losing collateral in a tax sale.

In addition, purchasers of homes with existing PACE obligations will be responsible for any unpaid balance of the obligation. The PACE obligation can also not accelerate - namely, the entire amount of the obligation cannot become due in the event of delinquency after endorsement of the FHA-insured mortgage.

A further guideline includes any PACE obligations on properties being readily apparent to mortgagees, appraisers, borrowers and other related parties. This transparency must extend to information being readily available for review in local public records.

In the event of a sale - including a foreclosure sale - of the property with outstanding PACE financing, the assessment must also remain with the property. In cases of foreclosure, priority collection of delinquent payments for the PACE assessment may be waived or relinquished. The buyer would be expected to take on the obligation burdens.

ABS

Ratings status clarified

PREPA has disclosed that it has not yet initiated the formal rating process for its new securitisation bonds, clarifying that none of the rating agencies have denied or rejected any request for a rating of such bonds. The move is in response to recent media reports that suggest rating agencies have declined to assign the restructuring bonds a high credit rating.

PREPA says that over the past few months it has discussed the regulatory process and its restructuring efforts with rating agencies, with the objective of keeping them up-to-date and maintaining an open dialogue. Although there is no assurance that the securitisation bonds will receive an investment grade rating, the authority "continues to believe that there is a path to obtaining" an investment grade rating and it intends to initiate a formal rating process with rating agencies in the near future.

PREPA's restructuring support agreement states that it should pursue ratings from Moody's and S&P.

Structured Finance

Placed issuance up

€74.5bn of securitised product was issued in Europe in 2Q16, according to AFME's latest data snapshot. This represents an increase of 30.9% from 1Q16 (€56.9bn) and an increase of 49.3% from 2Q15 (€49.9bn).

Of this volume, €29.1bn was publicly placed (representing 39.1%), compared to €14.3bn placed in 1Q16 (representing 25.1% of that quarter's total) and €28.4bn placed in 2Q15 (56.9%). UK RMBS led placed totals last quarter, followed by German auto ABS and pan-European CLOs.

AFME figures show that from 1Q16 to 2Q16: UK RMBS volume increased from €5.8bn to €11.6bn; German auto ABS increased from €650m to €4.6bn; and pan-European CLO issuance increased from €2.6bn to €4.6bn.

Structured Finance

TICC rotates loan strategy

TICC Capital says it shifted US$59.1m of first and second lien syndicated corporate loans in 2Q16 as part of its strategy to rotate to higher yielding, less liquid loans that can be held on a less levered basis. The loans were reduced by a combination of sales and repayments, at an average price of 100.2% of par and a weighted average yield estimated at 6.89%.

TICC also purchased US$36m worth of first and second lien loans, for an average price of 92.6% of par and an average yield of 11.6%. The firm says that this portfolio rotation resulted in an average yield increase of approximately 4.7% on the reinvested capital.

Structured Finance

Foreign demand to drive Indian ABS

Recent growth in the Indian securitisation market is primarily driven by the Reserve Bank of India's (RBI) policy of priority sector lending, according to S&P. Foreign banks' demand for pass-through certificate (PTC) securitisations is, in turn, partly due to their need to meet new priority sector lending targets. As the country's securitisation market builds a reputation and develops a history of stable issuance, the agency expects increased interest from other foreign investors to emerge in the next few years.

The RBI's priority sector lending policy requires a specified portion of bank lending to be made to specified sectors, such as agriculture, as well as micro and small to medium-sized enterprises. Banks typically achieve priority sector lending targets by: lending directly to these sectors; purchasing priority sector lending asset portfolios outright from originators (direct assignment); or purchasing PTCs backed by priority sector loan assets that are originated by non-bank finance companies.

Banks that don't meet their specified targets through one of these mechanisms are required to invest in low-yielding rural infrastructure development fund bonds. In light of the priority sector lending policy, banks tend to hold PTCs until maturity.

According to CRISIL, Indian securitisation volumes - defined as including direct assignments and PTCs - in fiscal 2015-2016 returned to a 2008 high. More than 60% of the almost R700bn in securitisation was from Indian banks' purchases of direct assignments. PTC volume also increased, accounting for 35% of overall securitisation issuance and 48% of the total priority sector lending assets in fiscal 2015-2016.

More recently, foreign banks with 20 or more branches showed significantly more interest in buying PTCs to meet the RBI priority sector lending policy by 31 March 2018. Foreign banks with 20 or more branches must meet the same priority sector lending targets as domestic scheduled commercial banks - 40% by 31 March 2018. Foreign banks with fewer than 20 branches must meet the overall 40% target by 2019-2020.

However, obstacles remain to the further development of an active securitisation market in India. For example, the industry could benefit from more players, which in turn could further invigorate supply and demand, as well as product innovation.

Mutual funds - active in the Indian securitisation market until 2008 - have been unwilling to participate in recent years, due to adverse tax authority assessments for fiscal years 2008-2009 and 2009-2010 that taxed SPVs. S&P notes that the 2016 budget clarifies the tax status of securitisation investments for mutual funds (SCI 20 June), but market participants may not return to the market until disputes with the tax authorities over historical assessments have been resolved.

Priority sector lending PTCs currently have a particular focus on commercial vehicles. Among the leading providers of commercial vehicle loans are six to seven non-bank finance company originators, including Cholamandalam Investment and Finance Company, Shriram Transport Finance and Sundaram Finance Group.

India has no specific legislation governing securitisation. Rather, the legal framework for Indian securitisations is based on existing trust, contract and property law, and a series of guidelines issued by the RBI.

Given the growing demand for finance as India's SMEs seek to expand, the regulatory framework is expected to continue to develop and facilitate the country's securitisation market. S&P lead analytical manager Kate Thomson concludes: "We believe that the RBI's regulatory support reflects the Indian government's acknowledgement of the importance of securitisation to funding the future development of India."

Structured Finance

Counterparty criteria updated

Fitch has revised its counterparty criteria for structured finance and covered bonds. The agency says that the changes will have a positive rating impact on up to 10 tranches across nine structured finance transactions globally and a negative impact on one tranche of an Australian ABS transaction. Two covered bond programmes could also potentially be positively impacted by the changes.

Structured Finance

Negative coupon impact examined

About 190 rated European RMBS and ABS tranches had coupons at negative levels, as of 1Q16, Moody's reports. Almost half of these tranches are concentrated in Spain, while RMBS accounts for 80% of them.

Moody's estimates that by year-end, the number of rated RMBS and ABS tranches with negative coupons may increase to about 550 tranches. "The immediate impact has been a fall in excess spreads in deals that have interest rate swaps. By year-end, we expect that the average annual impact will be a fall of 15bp. As of 1Q16, the average annual impact was a decrease of 4bp," says Antonio Tena, a vp at Moody's.

The vast majority of issuers are choosing to floor coupons at zero in the absence of explicit reference to negative interest in the documentation, while in other cases the original documentation has been amended to explicitly apply an interest rate floor at zero for noteholders. Moody's expects junior noteholders to be impacted the most by the reduction in excess spread, as they are only protected by cash reserves and excess spread. In contrast, senior noteholders benefit from higher credit enhancement as per the subordination.

Issuers are being incentivised to place interest rate floors at zero by the likes of the ECB, in order to make the securities eligible for purchase, or to conform to the regulations set by depositories like Euroclear and Clearstream.

Coupon flooring creates a cashflow mismatch because the issuer has to pay the absolute value of the negative rate to the swap counterparty, in addition to its contractual swap payment. However, the agency says the effect on cashflows is negligible - especially among recent transactions, which have employed the 'zero interest method' for swap transactions.

The risk to recent transactions is mitigated as the issuer is not obliged to pay the negative interest amount, only the contractual swap amount to the swap counterparty. Meanwhile, swap curves indicate that negative interest rates will last no longer than three years, which should limit the number of cash mismatches over the life of the transactions.

Negative interest also exerts downward pressure on other cash amounts or eligible investments held within a deal structure. However, this is expected to have a negligible impact because cash amounts tend to be small compared to the note amount.

CDO

CRE CDO switches jurisdiction

All membership interests in the DivCore CLO 2013-1 CRE CDO, together with the issuer's ordinary and preferred shares are set to be transferred from DivCore Sub Debt Club I REIT Holding to a newly established entity, LoanCore Capital Credit REIT (LCC REIT). Moody's notes that the move will not cause it to downgrade or withdraw its ratings on the notes.

The issuer is a private company limited by shares and incorporated in the Cayman Islands with limited liability. LCC REIT is a Delaware limited liability company.

The transfer is not expected to affect the transaction's qualification and taxation as a REIT and will be treated as a qualified REIT subsidiary.

CDO

Trups CDO deferrals dip

The number of US bank Trups CDOs combined defaults and deferrals decreased from 16.6% at the end of May 2016 to 15.6% at the end of June 2016, according to Fitch's latest index results for the sector. Most of this decline was due to new cures, although 0.3% is accounted for by Fitch ceasing to rate the collateral of one Trups CDO.

First BanCorp cured last month after deferring ever since March 2012. It accounts for total exposure of US$202m across 14 Fitch-rated Trups CDOs. The rating agency expects around US$31m of cumulative deferred interest to be paid.

Flagstar Bancorp, which has been deferring since January 2012, has also received regulatory approval to repay US$31m of deferred interest on outstanding Trups and also redeem US$267m of its TARP preferred stock. The total Trups exposure is US$209.5m across 18 Fitch-rated deals.

The remaining US$32.5m of cures from the month came from two banks across six CDOs. One defaulted issuer, with US$22.5m notional in one CDO, was sold for a recovery of only 0.2%. Three performing bank issuers with aggregate original notional of US$19.4m across three CDOs redeemed their Trups in June.

One bank with total notional of US$12m in two CDOs re-deferred. There were no new defaults of deferrals.

Across 73 Fitch-rated bank and mixed bank and insurance Trups CDOs, 221 defaulted bank issuers remain in the portfolio, representing approximately US$5bn of collateral. As of June, 88 issuers are deferring interest payments on US$877m of collateral, which still includes Flagstar Bancorp as a deferring issuer due to reporting lag. This compares to US$1.5bn of notional deferring one year previously.

CDS

Puerto Rico credit event called

ISDA's Americas Credit Derivatives Determinations Committee has resolved that a failure to pay credit event occurred in respect of the Commonwealth of Puerto Rico. The move follows Governor Alejandro Garcia Padilla's triggering of a moratorium in connection with US$911m of bond payments that were due.

The DC had previously met a number of times to consider whether the obligations of the Commonwealth of Puerto Rico meet the relevant obligation characteristics for a failure to pay credit event, as well as the effect of the language added by the 2012 ISDA US Municipal Reference Entity Supplement to the 2003 ISDA Credit Derivatives Definitions. ISDA will announce whether a CDS auction will be held in due course.

CDS

CDS commitments accepted

The European Commission (EC) has accepted commitments by ISDA and IHS Markit on CDS licensing (SCI 29 April). The EC had previously raised competition concerns relating to the licensing of intellectual property that is needed to offer trading services.

The EC's concerns related to the final price, which is used to value CDS if there is a default and over which ISDA claims proprietary rights, and also to the licensing of iTraxx and CDX indices. ISDA and IHS Markit's commitments address these concerns, as they should make it easier to trade CDS on exchanges, while improving transparency.

Both ISDA and IHS Markit have committed to exclude CDS dealers from taking individual licensing decisions and prevent them from influencing such decisions. ISDA will license its rights in the final price for the exchange trading on fair, reasonable and non-discriminatory (FRAND) terms, and also IHS Markit will license its rights in the iTraxx and CDX indices also on FRAND terms for exchange-traded financial products based on the indices it owns.

The commitments will apply for 10 years, during which time ISDA and IHS Markit's compliance will be monitored by independent trustees. Both sets of commitments are subject to third-party arbitration in case of dispute.

"Today's decisions ensure that all trading venues can benefit from FRAND access to data and intellectual property owned by ISDA and Markit. This will translate into more choice and lower transaction costs for investors and will also increase market stability," says Margrethe Vestager, commissioner in charge of competition policy.

CDS

Portugal Telecom CDS settled

The final price for Portugal Telecom International Finance CDS was settled at 20. Yesterday's auction saw 10 dealers submit initial markets, physical settlement requests and limit orders to settle trades across the market referencing the entity, after a bankruptcy credit event occurred in connection with the company (SCI 12 July).

CLOs

CLO relative value highlighted

Respondents to JPMorgan's latest quarterly client survey view CLO relative value as more compelling than other asset classes this quarter, compared to the 2Q16 survey. Spreads have tightened, but yield compression in broader markets likely explains this result, according to CLO strategists at the bank.

Survey respondents were also asked to assess appropriate pricing for top-tier, mid-tier and lower-tier managers in the US and European CLO markets. Although there is dispersion around each mean, ranges of 15bp-25bp for triple-A rated bonds and 75bp-160bp for triple-Bs were determined.

"Of course, tiering is a subjective measure. Respondents may have also included assumptions around bond/portfolio quality and not just a perception of the manager," the JPMorgan strategists note.

Meanwhile, the survey results suggest that investor cash levels are nearing historical highs. The proportion of investors with low levels of cash available declined, while those with moderate, high and very high cash levels nearly doubled - indicating that investors have more capacity to add paper.

From a positioning perspective, there appears to be strong demand for triple-A bonds (especially US paper), mezzanine bonds (both US and European) and US secondary equity. Finally, the ratio of buyers to sellers jumped to 19:1 - the highest since June 2015, but still less than the 20-25 plus territory seen during 2013-2014.

CMBS

CBL-linked liquidation highlighted

One of LBUBS 2006-C6's more storied assets, the Chapel Hill Mall (accounting for 5.7% of the pool), has been sold after being REO for nearly two years. The liquidation is the first of several anticipated dispositions linked to sponsor CBL & Associates Properties, including several specially-serviced loans in LBUBS 2006-C6, according to KBRA.

Kohan Retail Investment Group reportedly acquired the 666,203 square-foot regional mall for US$8.6m. KBRA's concluded loss scenario for the asset implies a US$64.2m loss (98.5% severity) upon liquidation. The agency anticipates that the disposition will result in a full write-down of the class H and J tranches.

Despite the loan's transfer to special servicing in November 2013, a third-party appraisal value was not reported until the August 2014 remittance date (see SCI's CMBS loan events database). The US$58.9m valuation eroded, due to deteriorating market conditions, a weakening tenant base and declining cashflows.

Among the other CBL-sponsored loans securitised in LBUBS 2006-C6 are Westfield Chesterfield (12.2% of the pool), Greenbrier Mall (6.2%) and Midland Mall (2.8%). The mall REIT has indicated that it will not be able to pay off any of these loans by their respective maturities during the next two months.

"Based on observations of prior workouts with CBL, all three malls are expected to be conveyed to the lender via a deed-in-lieu of foreclosure. The resolution of these assets is expected to result in high loss severities as well," notes KBRA.

Insurance-linked securities

ILS spreads hit new high

ILS issuance slowed in 2Q16 from the record-breaking first quarter, with only US$800m in catastrophe bonds hitting the primary market, according to Aon Securities' latest report on the sector. Spreads also reached a four-year high at 8.4%, corresponding to a weighted average expected loss of 5.05%.

Aon says that the contraction in issuance can be attributed to competition from traditional markets, as well as some sponsors' election to enter the alternative market earlier in the season. 1Q16 had contrastingly seen an unprecedented US$2.215bn in new deals. Nonetheless, the market still saw a wide variety of risk-return profiles available to investors across five transactions, ranging from low single-digits to almost 20%.

The slowing effect spilled over into the secondary market, which recorded a 32% drop in activity in 2Q16 from the previous quarter. According to FINRA's TRACE data, there were 218 trades totalling US$245.23m in the period, while the dollar volume of reported trades decreased just over 20% too.

Prices rose on a combination of the reduced issuance and the maturity of US$2.9bn in bonds in the quarter. In addition, investors continued to use the secondary market to redeploy available capital, resulting in more buyers than sellers.

Everglades Re 2014-1 reportedly traded heavily in the last few days of the quarter, with prices slightly lower from the all-time high in April. Aon says that the slight reduction in pricing correlates with the US hurricane season.

"By contrast, the west coast earthquake-exposed Acorn Re 2015-1 continued to be utilised as a portfolio diversifier, having achieved steady price increases throughout the quarter, rising from 101.25 to 103.25," says Aon. "Similar price increases were achieved for other portfolio diversifiers, as strong demand endured throughout the quarter for earthquake and non-US bonds."

Despite the traditional seasonal drop-off in the third quarter of the year, due to hurricane season, Aon expects an active 2H16. The firm notes that many investors have capital to deploy, which should also continue to lead to further secondary price increases.

RMBS

Deal agents to benefit weaker RMBS

The inclusion of deal agents is credit positive for future US RMBS transactions, Moody's says. Deal agents should strengthen the integrity and servicing quality of all transactions, but deals with weak collateral will benefit the most.

Under the Private Label Securitization (PLS) Initiative working group's proposal, deal agents would have a broader role and higher standard of care than other parties to RMBS transactions, which should mitigate risks associated with misalignment of interests and passivity. "The PLS Initiative proposal describes the role of the deal agent as analogous to that of a board of directors, with high-level oversight of other parties to RMBS transactions, coupled with a continuous fiduciary duty," says Moody's svp Yehudah Forster. "Deal agents should therefore strengthen transaction governance, increase transparency and reduce the likelihood of certain tail risks."

Additionally, because investors could sue a deal agent for failing to adhere to this higher standard of care, the agent has some 'skin in the game'. The requirement that deal agents report to and communicate with investors is also expected to increase transparency, as well as investors' confidence that transaction parties are acting in the best interests of the trust.

A deal agent's responsibility to oversee other parties that act on behalf of the trust should improve those parties' adherence to contractual requirements and cashflow accuracy. Equally, the flexibility of its role should allow it to manage unforeseen events in a way that protects the interests of all investors.

RMBS transactions backed by weak collateral are expected to benefit more from a deal agent's oversight than those backed by pristine collateral, as servicing tends to be more complex on non-prime, re-performing or non-performing transactions. In these cases, deal agents will be able to act as a check on servicers' decisions. The more loss mitigation decisions a servicer must make, the more opportunities the deal agent will have to add value.

Similarly, a deal agent's role in reviewing representations and warranties should add more value in deals backed by weak collateral. Assuming trigger events are based on a particular level of delinquencies or losses, the agent's review role will be more important where transactions have higher delinquency and loss expectations.

RMBS

Clydesdale braves Brexit uncertainty

Clydesdale is in the market with the UK's first post-Brexit vote RMBS. The Lanark 2016-1 transaction securitises Clydesdale and Yorkshire Bank Home Loans prime residential owner-occupied mortgages.

The deal comprises a single tranche of class 1A sterling-denominated notes with expected triple-A ratings from Fitch, Moody's and S&P. Approximately £770m of new loans is expected be added to the master trust pool, increasing the collateral balance to £4.4bn at close.

Moody's highlights the transaction's unique structural feature relating to the approximately 19.1% of offset mortgage loans in the pool, whereby the amount of interest charged on the loans is reduced in proportion to the amount of savings held in a linked account at Clydesdale. A mechanism is included in the structure that allows Clydesdale to compensate the issuer for the corresponding reduction in interest receipts.

By loan count, 28% of the loans in the trust pool will be concentrated in Scotland, 28.2% in York and Humber, and 8.8% in the North of England - which is higher than the proportion of the population in these regions. Fitch notes that this means the portfolio is more likely to be exposed to regional economic declines or natural disasters, such as flooding. Consequently, the agency has increased the foreclosure frequency by 15% for all loans in these regions.

The portfolio will have a weighted average (WA) seasoning of 50 months, a WA original loan-to-value ratio (OLTV) of 71.3% and WA debt-to-income ratio (DTI) of 40.5% at close. Around 31.8% of the portfolio falls in the high-value bracket, which is at the higher end of UK RMBS transactions rated by Fitch. The agency has therefore applied additional haircuts to the valuations to account for the lower liquidity and demand for such properties in an economic downturn.

Meanwhile, Moody's notes that under its central scenario, the UK's decision to leave the EU will lead to a prolonged period of uncertainty. However, for Lanark Master Trust's underlying portfolio, the rating agency does not expect a material impact on defaults or recovery rates due to the good levels of collateral diversification.

RMBS

Spanish full-recourse eyed

Conditions that guarantee the payment of a Spanish mortgage loan if the sale of the property at auction yields an amount that is lower than the outstanding debt are being weakened, according to Moody's. However, the rating agency says that the full-recourse feature of the Spanish market remains strong.

"Our loss assumptions for Spanish residential mortgages heavily rely on full recourse conditions and significant changes would trigger an increase in our expectation of losses. That said, Moody's base-case scenario is that the nature of the full recourse to mortgage borrowers remains robust, despite recent government initiatives," says Alberto Barbachano, a vp and senior credit officer at Moody's.

Juan Miguel Martin-Abde, an analyst at Moody's, adds: "Under certain circumstances, recent policy changes would weaken full recourse conditions, which are a key strength of the Spanish market."

A non-recourse legal framework adversely affects a borrower's 'willingness to pay'. In such a scenario, the default frequency would increase as more borrowers default on their properties, which in turn would increase loss severity.

Moody's notes that the Spanish government's most recent initiatives aim to alleviate pressure on financially vulnerable borrowers, either by reducing their debt burden or by delaying house evictions. Several measures have been introduced to reduce borrower debt. For example, for first home properties, if the borrower pays 65% of the remaining debt in five years after repossession - or 80% in ten years - the lender is required to write-off the rest of the debt.

Laws have also been amended to provide for a write-off regime for individuals entering insolvency. A number of laws have increased the moratorium period on evictions from properties being repossessed by creditors. The last update extended the moratorium by two years to May 2017.

However, the country's full-recourse framework remains broadly unchanged. Changes to the legal framework were either minor or applicable only to a small number of borrowers because of the tight eligibility criteria, Moody's says.

The number of Spanish foreclosed mortgages that were taken to court stabilised to 68,000 cases in 2015 from a peak of 93,600 cases in 2010 (in contrast to around 26,000 foreclosures in 2007). This has led to a reduction in the length of time taken to foreclose, thereby lowering the severity of losses on loans.

In Moody's view, available data underestimate the actual number of properties that have been repossessed by Spanish financial entities. First, more than one property may have been involved in one foreclosure process. Second, Spanish mortgage lenders have generally become more willing to accept payment in kind.

Spanish banks held €84bn worth of foreclosed properties on their books, as of December 2015, according to the Bank of Spain.

RMBS

Granite sale examined

The UK National Audit Office (NAO) has praised the British government for its £13.3bn sale of Northern Rock assets late last year to Cerberus, describing it as "value for money". The disposal of the assets in November 2015 was the government's largest ever financial asset sale.

The sale, which was conducted by UK Asset Resolution (UKAR), comprised of £11.9bn of mortgages from the Granite debt portfolio, with an additional £1.4bn in loans (SCI passim). The taxpayer received £5.5bn in cash, while Cerberus took on nearly £8bn in liabilities. Some 270,000 mortgages and loans were sold in the deal.

Although the sale took 18 months to complete, the NAO notes that the sale price exceeded UKAR's valuation of the assets. The final price achieved was £74m, or 0.6%, above the face value of the loans and £450m (3.6%) above UKAR's valuation.

The Granite portfolio attracted strong interest from investors due to the high yield on offer - 85% of the mortgages pay above 4.5% interest. Although the loans also had higher than market average LTVs and arrears, UKAR, UK Financial Investments and Treasury have been credited for reacting "quickly" and obtaining "relevant approvals" in pursuing the sale opportunity.

The NAO's report does point out that the large scale of the portfolio reduced the number of potential bidders, but did not prevent a healthy, competitive number from still being involved. It adds that UKAR addressed the issue to a certain extent by reducing the financing risk for bidders, setting only a £5m requirement of funding, despite the portfolio's near-£8bn in financing overall. This allowed private equity investors to jump in, relying on third-party funding rather than banks, which can also use customer deposits.

Nevertheless, the report also underlines a number of downsides with the sale process, including how UKAR had estimated that multiple, smaller transactions would have increased the asset valuation by up to £300m. However, this would have taken up to 27 months longer to complete and does not include the potential downside risk involved.

Further, the NAO criticises the "limited degree of competitive tendering in UKAR's procurement process." Credit Suisse, a financial adviser on the sale, was involved in the early phases to sell its mortgage servicing operation and subsequently won a tender against a small number of preselected competitors.

During the process, the bank's fee was increased from £2m to £4.5m to reflect changes in the transaction, including permitting the adviser to act as financing bank to bidders. Previous rules had outlawed this process due to the conflict of interest, but this was lifted by UKAR due to the uniquely large size of the transaction.

Despite the lengthy duration of the sale, Cerberus swiftly followed through this year with the refinancing of the Granite portfolio when it issued the largest post-crisis deal so far in the UK RMBS market (SCI 5 April). The £6.2bn Towd Point Mortgage Funding 2016-GR1 has been particularly highlighted for its unique net weighted average coupon cap feature.

RMBS

RMBS originator pays to settle

Syncora Guarantee has settled a dispute with an originator of an RMBS for a cash payment of US$40m. The dispute concerned an insured RMBS-related transaction which was not the subject of litigation.

The settlement is expected to increase Syncora Holdings' GAAP net income and shareholders' equity by US$40m and is expected to have the same effect on Syncora Guarantee's statutory-basis net income and policyholders' surplus. Having reached this settlement, Syncora Guarantee is not currently involved in any dispute concerning any material RMBS-related matter except to the extent that such matters are disclosed in Syncora Holdings' and Syncora Guarantee's respective financial statements.