Contents

ABS

Benchmark beginnings

Positive reception for debut device payment ABS

Verizon's debut securitisation of device payment plan agreements (DPPAs) earlier this month marked the successful launch of a new asset class, which has the potential to become an on-the-run benchmark consumer ABS sector. Heavy oversubscription of the US$1.69bn transaction - dubbed Verizon Owner Trust 2016-1 - and a tight print, together with rising handset receivables volumes, are expected to entice other wireless carriers to tap the market in the coming months.

Rated by Fitch and S&P, VZOT 2016-1 comprises three tranches: the US$1bn triple-A rated 2.52-year class A notes priced at swaps plus 55bp (versus initial guidance of 65bp-70bp); the US$84.52m double-A 3.22-year class Bs priced at plus 70bp; and the US$84.51m single-A 3.22-year class C notes were not offered. The deal - via Bank of America Merrill Lynch, Barclays and MUFJ - priced inside other transactions brought to the market in the same week by more established programmatic issuers (see SCI's new issue database), with the senior notes subsequently tightening by 14bp on the first day of trading.

JPMorgan ABS analysts state that the tight spreads represent a "huge win" for Verizon, setting an "excellent benchmark" for the new asset class. They add that the deal was noteworthy for its large size and the investment grade sponsor (Verizon is rated Baa1/BBB+/A- by Moody's, S&P and Fitch), with investors seemingly according it top-tier status.

The assets backing VZOT 2016-1 comprise 3.1 million handset receivables from across 2.5 million customer accounts, with a weighted average obligor FICO score of 708. The WA remaining term on the contracts is 22 months, the WA monthly payment is US$28 and the WA customer tenure is 87 months. Obligors with 60-plus months of customer tenure account for 57.34% of the pool, while those with less than 12 months of customer tenure account for 17.27% of the pool.

In essence, the transaction is a consumer lending securitisation, according to Andreas Wilgen, co-head of Fitch's US ABS group. "Consumers are tied to the contracts for the provision of network services: as long as Verizon is able to continue to provide the services, remaining current on the DPP ranks high in their priority of payments. But there could be a disconnect between service and payment if Verizon is no longer around," he explains.

He adds that the deal has a unique dependency on Verizon as both network provider and servicer. "There is indirect and direct exposure to Verizon. The indirect exposure is via the risk of Verizon defaulting and customers, as a result, changing their payment behaviour, while the direct exposure comes from the customer upgrade option embedded in the DPP."

Under Verizon's Device Payment Program (DPP), if a customer pays down 50% of their contract and remains in good standing, they have the option to upgrade their phone. In this case, Verizon will pay off the original balance, providing the handset is returned.

Given the difficulty of modelling the indirect exposure, as no mobile phone operator has ever defaulted, Fitch applied a higher stress multiple to account for this risk. Similarly, the size of the direct exposure depends on various factors such that the agency approximated the potential exposure. Overall, the combination of the direct and indirect exposure to Verizon resulted in the deal's ratings having more dependency on the credit rating of Verizon than in a typical consumer loan ABS.

"In terms of cashflow modelling, we began with a default base case, applied stressed multiples and then added 6% for rating levels above Verizon's single-A minus rating. While the transaction isn't directly credit-linked to Verizon, there would be rating implications if Verizon is downgraded," observes Eric Orenstein, analyst in Fitch's US ABS group.

While a limited downgrade of Verizon is unlikely to result in a downgrade of the deal's senior notes, the agency warns that a multi-notch downgrade of the sponsor - particularly to speculative grade - will increase the likelihood of a downgrade of the senior notes below triple-A. However, other factors - such as the strength of Verizon's network, a reduced revolving period, lower-than-assumed direct exposure through the upgrade programme and the available credit enhancement - could lessen the rating impact.

Similarly, S&P notes that its ratings on VZOT 2016-1 are constrained by the likelihood of cellular service being materially disrupted as a result of a Verizon bankruptcy or the network experiencing a prolonged disruption caused by factors other than technology failure or natural hazard. To assess the maximum potential ABS ratings for the deal, the agency's analysis considered the actual business risk profile assessment of Verizon, coupled with a theoretical minimal financial risk profile assessment in order to arrive at an 'anchor assessment'. Its analysis provides that the maximum potential ABS ratings can be up to a full category (three notches) higher than the anchor assessment, after consideration of factors that are most relevant to the survivability of the service provider's network and the likelihood of its continued operation by either the original provider or another entity.

S&P's anchor assessment for Verizon is double-A minus and the triple-A maximum ratings on the VZOT 2016-1 notes reflect factors that include its market-leading position in wireless services in the US (with over 112.1 million customers and a roughly 35% market share, as well as a large network) and its high technology and spectrum portfolio standards. The agency highlights that potential changes in the anchor assessment - through changes in Verizon's corporate business risk profile assessment - and in its views of these factors could result in changes in the maximum potential ratings of the VZOT 2016-1 notes.

Orenstein points out that Fitch's base-case loss assumptions were derived from data provided by Verizon since its device payment programme began at end-2013, as well as data since 2007 from its previous instalment purchase programme. "The majority of Verizon customers took loans out under its former subsidy programme and the penetration of the DPP continues to grow. Performance under the subsidy programme is a good indicator for performance under the DPP."

As of 1Q16, the aggregate principal balance of DPP loans outstanding was approximately US$12.8bn, up from US$5.2bn the prior year. In its roadshow presentation for the deal, Verizon highlighted 15 years of pro-cyclical and relatively stable charge-offs of between 1%-3% across its instalment purchase programme.

While a Verizon bankruptcy could trigger certain scenarios, Wilgen suggests that most are unlikely, given the legal framework and structure of the deal. "Verizon is incentivised to continue servicing the deal and so the likelihood of payment disruption is low," he says.

The triple-A, double-A and single-A tranches have initial hard credit enhancement of 30.6%, 24.65% and 18.75% respectively. Initial overcollateralisation is 17.7% of the pool balance (which will be required to step up to a target of 21.7%, if pool quality declines below certain thresholds), while the initial reserve account totals 1%, with a target of 5%.

The transaction differs from a typical revolving deal due to the discounting mechanism employed. Under the DPP, customer instalments are fixed for two years, but there is no interest component in the repayments. In the case of the Verizon deal, the assets were sold to the SPV at an 8% discount on NPV, similar to lease ABS deals.

The initial revolving phase is up to two years, subject to certain amortisation events. The structure features credit enhancement tests, pool composition tests and amortisation triggers designed to limit deterioration in pool quality and credit enhancement during this period.

Thanks to the positive investor reception to the Verizon transaction and the tight print, Wilgen suggests that it wouldn't be surprising if other mobile phone operators tapped the securitisation market with similar deals. He indicates that further issuance is likely in 2017, but says it is too early to call volume levels and which sponsors will be involved.

Nevertheless, the JPMorgan analysts note that DPPAs have the potential to become a notable addition to the consumer ABS sector in terms of volume and pricing benchmark. Moody's estimates that the US handset receivables balance could grow to US$55bn over the next two years, from US$32bn as of 31 March 2016, for the top four wireless carriers - Verizon, AT&T, T-Mobile and Sprint - as sales of handsets via payment plans soar. Certainly Verizon is expected to be a regular issuer, having previously completed quarterly private bank securitisations since 1Q15 for a total of US$11.9bn receivables sold through 1Q16.

A large number of crossover corporate investors reportedly contributed to the oversubscription on VZOT 2016-1. The analysts suggest that the presence of corporate buyers should add to the bonds' liquidity, but may also add greater volatility to secondary trading versus plain vanilla surrogate ABS.

"Given the balance of risks, we view the VZOT pricing as rich relative to other consumer ABS, but expect that spreads will likely improve on subsequent deals from its debut," they observe. "Corporate demand will likely remain strong, given the VZOT ABS is cheap relative to comparable unsecured credits. We like the diversification from adding Verizon to an ABS portfolio and believe device payment ABS has the potential to be an on-the-run benchmark consumer ABS sector."

However, the analysts currently view cross-border bankcard ABS, retail card ABS or FORDR auto ABS as better value in terms of comparable credits.

CS

RMBS

Foreign policy

US agency MBS picking up European, Asian demand

A surge in foreign interest in US agency MBS over recent months is adding a broader dynamic to the sector. Asian and European accounts are leading the charge in demand, with the latter emerging as a new investor frontier.

Indications of shifting demand began to surface in May when US Treasury International Capital (TIC) data revealed a spike in net demand and the highest purchase figures outside of the US for 18 months. Wells Fargo structured products analysts note that increasing demand was particularly evident in Europe at the time. Aggregate purchases of US agency assets by continental investors in March stood at US$32.3bn, of which MBS made up US$27.2bn.

This was followed by similarly strong demand in April, with an additional US$30.2bn in agency bond purchases, US$17.6bn coming in the MBS category. Recently released net figures for May show that interest has not cooled off, with net purchases standing at US$10.6bn. The figure is slightly down from April and March's US$11bn and US$11.9bn net figures, but up dramatically from the US$3.1bn total in February.

"I recently came back from Europe and the discussions I had revealed that there is a genuine interest in agency MBS," says Jeff Kong, partner and portfolio manager at Tradex. "But it should be considered a more global interest when you also factor in the demand coming from Asia."

The May figures revealed an overall global net increase in foreign holdings in agency MBS, rising by a further US$9.5bn - the fourth straight month to show an increase. European demand totalled US$10.6bn in net purchases, but was topped by Asian demand at US$15.2bn. The figure brings net purchases by Asian investors to roughly US$82bn so far this year.

By jurisdiction, Japanese and UK investors are top, accounting for US$9.2bn and US$7.9bn in net purchases respectively. However, the diversity of demand is reflected further down the buyer list, which includes investors from Taiwan (accounting for US$2.3bn), Luxembourg (US$1.6bn), South Korea (US$900m) and France (US$800m).

"South Korea is a good example, as its interest aligns with them coming up to speed on alternative investments," adds Kong. "But they are still young in this space, so it's an education process right now."

Nonetheless, a recent TIC report shows Asian accounts as the overwhelming aggregate holders of agency MBS, far ahead of European accounts. The top holder by country is China at US$208bn, with Ireland the top European holder at US$28.5bn.

TIC data for May also implies that there are relatively few meaningful sellers in the sector. The only noteworthy sellers were from the Cayman Islands (at US$2.5bn) and the British Virgin Islands (US$1bn).

Both the growing interest in buying and the increasing incentive to hold onto agency MBS across Europe and Asia continues to be driven primarily by the hunt for yield. "To understand this demand in a larger context, you need only see that the appetite is strong for yield in a time when the market is starved of it," says Richard Travia, partner and head of risk management at Tradex. "Agency MBS provides a better yield opportunity than sovereign debt, while carrying either an implicit or explicit government guarantee."

He continues: "Thus, investors do not have to latch on to greater credit risk to obtain higher yields."

Wells Fargo research shows that German and Japanese five-year sovereign yields have been hitting -0.38% and -0.22% respectively. UK yields fare a bit better at 0.82%, while US Treasuries are at 1.35%. In comparison, GNMA II 3% and FNMA 3% bonds are posting coupons of 2.21% and 2.5% respectively.

At the same time, the post-crisis stigma associated with mortgage-related securitisations appears to be slowly fading. "There is no doubt that many mortgage strategies are often still overgeneralised to be investing in legacy subprime," says Kong. "But there are several mortgage strategies, such as our Tradex Relative Value Fund, that primarily invest in agency MBS. These are assets that are guaranteed by the agencies, with prime borrowers, and it's part of the reason why we are seeing these foreign firms begin to shift their strategies."

This has provided a mandate for specialised strategies to set new trends, such as in the form of targeted funds. The most prominent recent example was Blackrock's launch of the first European ETF to invest in high quality US RMBS (SCI 26 May). The iShares US MBS UCITS ETF - also referred to as the IMBS fund - provides exposure specifically to triple-A rated US agency bonds that can be traded in euros or US dollars.

"Blackrock identified that the agency market is a very liquid option, so this could become an attractive approach to sell to investors going forward," Kong explains. "I've also heard talk of more liquid demand potentially surfacing in Europe, which is being driven by the continent's shift towards using UCITS funds."

One area that may have been considered as a potential hitch to the sector's growing foreign demand was the recent UK referendum vote to leave the EU. However, fears that it may have profound global economic effects have so far not come to fruition.

"The initial result could be seen in some of the significant market volatility that shortly followed," says Kong. "MBS underperformed Treasury hedges in the days that followed, given the temporary flight to quality."

He concludes: "However, purchasing has resumed and spreads have tightened with the decrease in volatility. Over the next month, we may see a temporary increase in prepayments, due to a lower driving mortgage rate during July, following the decline in 10-year yields."

JA

Secondary markets

Euro secondary slow

The summer slowdown is manifesting itself across the bulk of the European securitisation secondary market.

"It's been very quiet in the past few days with flows down significantly and BWIC volumes subdued," says one trader. "That's all thanks to the lack of volatility and the start of the summer lull."

However, the trader adds: "We have seen some enquiries in UK paper on the back of the Lanark transaction. Overall spreads continue to tighten across all ABS/MBS sectors including UK non-conforming post-Brexit, though movement there is restricted to 2.0s and seniors."

Meanwhile, CLOs are seeing a little bit more activity, the trader reports. "CLOs continue to tighten especially in the single-A to triple-B area with the latter now at around 435. Trading activity and price movements in the sector are a direct result of a still quite healthy pipeline and supportive global markets."

There is currently one BWIC on the European schedule today - a two line RMBS list due at 16:00 London time. It comprises €8.5m ATLAM 2 A and €3m DFUND 2016-1X A1A. Only ATLAM 2 A has covered on PriceABS before, last doing so at 87.03 on 10 May 2016.

Secondary markets

US CLOs to be tested

The US CLO secondary market is continuing to rally, but will be tested by a busy BWIC schedule today.

"The market's still running up significantly, but there is also a sense of caution at the same time," says one trader. "This wariness is directed towards the potential for a catalyst to suddenly disrupt tightening. Hence, there is also an element of risk-off sentiment."

Nevertheless, the flurry of BWICs circulating today suggests that sellers are sensing demand is still strong, the trader argues. "Today will be a good test to see what trades and what DNTs."

The trader continues: "There's still good demand for equity, but the real strength of the rally is still coming in 2.0 mezzanine, which is effectively creating a domino effect, where all demand seems to be concentrating in this one particular space."

Part of the current attraction to mezz is the safety that is associated with investing in middle of the stack. Consequently, the trader says: "Any short-dated stuff between double-B to single-A territory pieces has been getting picked up. The question now is how much tighter can spreads go here and what will be the dampener? It's not that there is any foreseeable disruption, but the scepticism generated by the early year volatility has not been forgotten."

There are nine BWICs on the US CLO calendar today so far. Of those still due, the largest in original face terms is a six line US$21.6m triple- and double-B auction due at 13:00 New York time.

The list consists of: ACIS 2014-4A D, JEFFM 2015-1A E, LOOM 2015-2A D, MCLO 2013-5A D, NMRK 2014-2A E and WOODS 2014-14A E. Only one of the bonds has covered with a price on PriceABS in the past three months - ACIS 2014-4A D at M70S on 10 May.

Secondary markets

Euro CLOs switch

Activity in the European CLO secondary market has switched from sporadic to fluid this week.

"The market has become a lot more fluid over the past week or so," says one trader. "With that has come continued tightening across the capital structure in both 2.0s and 1.0s."

The trader continues: "We've seen good two-way flows across the board. There's not really any sector lagging, but if I had to pick one I'd say single-B 2.0s are generating slightly less interest."

1.0s in particular have moved significantly tighter in the past few sessions, the trader says. "Anything investment grade and with less than three-years to run is at really strong levels now."

Volumes are no longer just dealer driven as they were last week. "We're seeing a lot of interest from European and US investors," the trader says. "In the latter case, the thinking seems to be that because the US has already rallied so strongly Europe, where price movement has been a little sleepier, offers better opportunities."

There is currently one European CLO BWIC on the schedule for today. It is a €41.225m 11 line mezz list due at 14:00 London time.

It comprises: ARBR 3X E, CADOG 3X E, CGMSE 2014-3X E, CGMSE 2015-2X D, CORDA 4X F, DRYD 2014-35X E, DRYD 2015-39X E, DRYD 2015-44X E, GROSV 2015-1X CN, JUBIL 2014-14X F and TYMPK 1X D. Two of the bonds have covered with a price on PriceABS in the past three months - DRYD 2014-35X E at 89.13 on 11 July and DRYD 2015-44X E at 95H on 5 July.

Secondary markets

US CLO rally continues

The US CLO secondary market is continuing a strong week with buyers still pouring money into the space.

"The focus continued to be in mezzanine and equity yesterday and it looks like it will be the same today," says one trader. "I think a lot of it is hedge fund money trying to tap into the liquidity as the rally goes in, so it's keeping the market strong. "The exception is the triple- to single-A range, where sellers are not really surfacing right now."

BWIC lists are still aplenty with nine US CLO auctions due so far today following a solid number on offer earlier in the week. "There's an equity list later today which is the largest for a while," the trader adds. "It will be a good indicator of the trading prospects for the bottom of the stack because it covers a broad spectrum of names."

The equity BWIC totals $110.5m original face across 16 line items made up of 14 equity pieces plus one double-B and one single-B slice. Due at 13:30 New York time it consists of: ARES 2014-1A SUB, CGMS 2013-2A SUB, CRMN 2012-1A SUB, CRMN 2012-1X E, KVK 2012-2A SUB, KVK 2014-1A SUB, LONGF 2013-1X SUB, MDPK 2016-20A SUB, NEUB 2012-13A F, NEUB 2012-13A SUB, OCT23 2015-1A SUB, RGTII 2013-2A LP, SHACK 2012-2A INC, SHACK 2013-3A SUB, TELOS 2013-4A SUB and VENTR 2014-16A SUB. Only two of the bonds have covered with a price on PriceABS in the past three months - RGTII 2013-2A LP at L50S on 3 May SHACK 2012-2A INC at LM50s on 17 June.

Another list catching the eye is a Trups CDO auction due at 11:00 today. The trader notes: "There's 34 names and it's got a bit of variety with both first and second pays. It will be interesting to see what trades and at what price."

The $60.99+m original face list consists of: PRETSL 9 A2, PRETSL 10 A1, PRETSL 10 A2, PRETSL 11 A1, PRETSL 11 A2, PRETSL 12 A1, PRETSL 12 A1, PRETSL 13 A1, PRETSL 14 A1, PRETSL 14 A2, PRETSL 15 A1, PRETSL 16 A1, PRETSL 17 A1, PRETSL 18 A1, PRETSL 20 A1, PRETSL 22 A1, PRETSL 24 A1, PRETSL 24 A2, REGDIV 2004-1 A1, REGDIV 2005-1 A1A, REGDIV 2005-1 A2, SLOSO 2007-1A A1LA, SLOSO 2007-1A A1LB, TRAP 2003-3A A1B, TRAP 2003-4A A1B, TROPC 2004-1A A1L, TROPC 2004-1X A1L, TROPC 2004-4A A1L, USCAP 1 A1, USCAP 2 A1, USCAP 2 A1, USCAP 3 A1, USCAP 4 A1 and USCAP 4 A2. None of the bonds has covered on PriceABS in the past three months.

Structured Finance

SCI Start the Week - 25 July

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

Pipeline
Last week's pipeline activity was largely in line with the week before it. There were four new ABS added to the list, along with three RMBS, three CMBS, a CLO and a CDO.

US$190m Earnest Student Loan Program 2016-C, €1bn IM BCC Cajamar PYME 1, US$600m Kubota Credit Owner Trust 2016-1 and US$480.55m SoFi Consumer Loan Program 2016-2 accounted for the ABS. The RMBS were US$348.5m Sequoia Mortgage Trust 2016-2, Torrens Series 2016-1 Trust and Towd Point Mortgage Trust 2016-3.

US$264m COMM 2016-GCT, US$800m DBJPM 2016-C3 and US$893.7m DBJPM 2016-SFC were the CMBS. The CLO was US$368m ICG US CLO 2016-1 and the CDO was US$333.75m Trups Financials Note Securitization 2016-1.

Pricings
A long list of deals priced last week. There were 15 ABS prints and a further five RMBS, a CMBS and five CLOs.

The ABS were: US$230m American Credit Acceptance Receivables Trust 2016-3; €700m BBVA Consumo 8; US$1.35bn Capital One Multi-asset Execution Trust 2016-3; US$750m CARDS II Trust Series 2016-1; US$850m Chase Issuance Trust 2016-4; US$318.5m CPS Auto Receivables Trust 2016-C; €800m FCT Ginkgo Compartment Personal Loans; US$836m Ford Credit Floorplan Master Owner Trust A Series 2016-3; US$200m Ford Credit Floorplan Master Owner Trust A Series 2016-4; US$755.21m John Deere Owner Trust 2016-B; US$184.9m Marlette Funding Trust 2016-1; US$750m Nissan Master Owner Trust Receivables Series 2016-A; US$422.6m SoFi Professional Loan Program 2016-C; €600m Tagus STC Volta IV; and US$683m World Financial Network Credit Card Master Note Trust Series 2016-A.

US$1.33bn CAS 2016-C04, C$780m Fortified Trust Series 2016-1, US$350m Freddie Mac Whole Loan Securities Trust Series 2016-SC01, £750m Lanark 2016-1 and A$350m Triton Trust No.7 Bond Series 2016-1 were the RMBS. The CMBS was US$200m B2R Mortgage Trust 2016-1.

Lastly, the CLOs were €361m Adagio CLO 2016-5, US$506m BlueMountain CLO 2016-2, US$410m Golub CLO 2016 (M), €452m Harvest CLO XVI and €414m Jubilee CLO 2016-XVII.

Markets
The US CLO secondary market maintained its momentum last week, particularly in the middle of the stack, as SCI reported on Thursday (SCI 21 July). "It's been a very fast, one-way express since Brexit," says one trader. "The rally has been particularly strong in mezzanine."

European CLO activity was more sporadic, as SCI reported earlier in the week (SCI 19 July). "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."

Elsewhere in the European ABS and RMBS secondary markets, spreads were holding firm (SCI 21 July). Wider market positivity fed into ABS/RMBS and generated improving market sentiment.

Editor's picks
CDQ development: 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...
Fragile China: Non-performing loan securitisations ended an eight-year hiatus in China in late May when Bank of China and China Merchants Bank 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...
Weighing it up: The European secondary ABS value proposition is changing. Increasingly, credit is not investors' primary concern as relative value considerations come to the fore, while potential future developments continue to weigh on traders' minds...
Volume growing: 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...

Deal news
• 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.
• 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.
• 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 final price for Portugal Telecom International Finance CDS was settled at 20. [Thursday]'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).

Regulatory update
• 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 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).

Deals added to the SCI New Issuance database last week:
Annisa CLO; BMW Vehicle Owner Trust 2016-A; Capital Auto Receivables Asset Trust 2016-2; CarMax Auto Owner Trust 2016-3; Dell Equipment Finance Trust 2016-1; Enterprise Fleet Financing Series 2016-2; FREMF 2016-KJ06; Mariner CLO 2016-3; Nissan Master Owner Trust Receivables series 2016-A; OneMain Direct Auto Receivables Trust 2016-1; Sierra Timeshare 2016-2 Receivables Funding; Verizon Owner Trust 2016-1; WABR 2016-BOCA; World Omni Automobile Lease Securitization Trust 2016-A

Deals added to the SCI CMBS Loan Events database last week:
CGCMT 2007-C6; COMM 2015-CR²2; CWCI 2007-C2; DivCore CLO 2013-1; ECLIP 2006-4; EPIC DRUM; JPMCC 2006-LDP9; JPMCC 2007-CB18 & JPMCC 2006-LDP9; JPMCC 2007-CB19; LBUBS 2006-C6; MSBAM 2015-C21; MSC 2011-C3; RIVOL 2006-1; TITN 2006-1, TITN 2006-2, TITN 2007-2 & TITN 2007-CT1; TITN 2006-5; TITN 2007-2; TMAN 5; TMAN 6; WFRBS 2011-C4; WINDM VII

CLOs

CLO trading flexibility 'reducing'

US CLO 2.0s are losing trading flexibility because of leveraged loan quality deterioration and diminished spreads, says Moody's. Managers are struggling to maintain compliance with collateral quality tests while sourcing eligible collateral investments.

Of the 613 US CLO 2.0s Moody's rates that were still reinvesting as of 1 June, 20 were failing either their WARF or WAS tests. Another 35 were not yet failing the WARF or WAS tests, but had minimal cushion remaining on both covenants.

CLO collateral quality tests work in a matrix, so managers can trade off one credit metric at the expense of another to remain in overall compliance. If credit quality worsens in the loan market, for example, reinvesting CLOs could move to a worse portfolio WARF covenant in the collateral credit quality matrix if the portfolio WAS is sufficiently higher than its covenant.

In deals that are failing or close to failing their WARF or WAS tests, managers have limited ability to compensate for one test's deficiencies with another's strength, says Moody's. In these deals managers must typically maintain or improve the existing collateral quality metrics in the matrix line they have chosen before the test failure.

Recent credit deterioration has caused a number of CLOs to fail their WARF covenants, and already tightened collateral WAS limit managers' ability to trade off WAS cushion for higher WARF covenants. Both the median WARF and WAS have worsened for CLO 2.0s since the end of 2015, while most reinvesting CLOs are already using the maximum benefit from WARR outperformance in calculating their WARF or WAS covenants.

The main driver for tightened collateral WAS in CLOs has been a reduced benefit from Libor floors. Of the 613 reinvesting CLO 2.0s Moody's rated as of 1 June, 19 deals were failing their WARF tests, all of which were passing their WAS covenants, but by an average of just 7bp. The WARF failures were largely the result of deterioration in energy and commodity credits, the growing number of issuers rated B3 negative and lower, and an increase in assets with negative outlooks, says the rating agency.

"Although just one CLO 2.0 we rate was violating its WAS test as of June, the median WAS for CLO 2.0s has declined by 24bp since November," says Moody's. "For the same period, three-month Libor increased to the mid-60s from the mid-30s, which reduced benefits from Libor floors and drove the WAS decline."

Another 35 deals had less than 20bp of WAS cushion against their covenants and less than 100 points of WARF cushion against their covenants as of June. As these deals outperform their WAS covenants by just 11bp, any increase in Libor would further pressure their WAS tests. Assuming no changes to current collateral portfolios, the WAS for CLO 2.0s could decrease by 20bp if the three-month Libor increases by another 25bp. Their diversity scores exceed covenants only by five points on average, also leaving them with little room to manoeuvre in their covenant matrix.

JL

Structured Finance

Maynard team poached

Bradley Arant Boult Cummings has brought in Julia Bernstein as one of five new recruits to the law firm. She joins as partner, working within the real estate and banking and financial services teams.

Bernstein will focus on all aspects of the representation of lenders and borrowers in secured and unsecured transactions, as well as structured finance and multi-state transactions. This includes representing banks, financial institutions and other lenders as creditors in loan workouts and debt restructuring efforts.

The other hires are Timothy Gregg and Andrew Nix as partners, Stephen Hinton as counsel and Maggie Cornelius as associate. All five move over from Maynard Cooper & Gale.

Structured Finance

Capital markets pro tapped

LeaderOne Financial has hired Todd Leddon as svp of capital markets. In the role, he will focus on interest rate risk management, securitisation, loan pricing/best execution, margin management, financial modelling and negotiations.

Leddon joins the mortgage lender from Skyline Financial, where he was vp in capital markets. He has also held senior roles at CS Financial, Bank of America and Countrywide.

Structured Finance

Commercial PACE financing boost

CleanFund has entered into an agreement with Soligent entity Solar Engine to finance the purchase and installation of solar panel systems for commercial, multifamily, non-profit and other non-residential buildings in the US. Dealers and installers who are members of the Soligent network can now access CleanFund's SolarPACE financing programmes.

CleanFund's new SolarPACE programme was designed specifically for solar project financing and enables commercial property owners to achieve immediate positive cashflow, with a financing term of up to 30 years to match the expected life of solar PV systems. The firm says that in the long term its aspiration is to tap the securitisation market for additional funding.

Structured Finance

Client support team boosted

Assenagon says it is pushing a more international strategy with the hire of Thomas Kramer to its sales team, where he will provide client support primarily targeting Scandinavia and the Benelux countries. Kramer will interact with institutional clients, such as asset managers, family offices, insurance companies, pension funds and banks.

He joins following a stint as senior relationship manager at Quoniam Asset Management, in which he was responsible for the institutional business development for German corporates and other European countries. Before this, he worked within institutional sales at S&P.

Structured Finance

KBRA confirms SF managers

Kroll Bond Rating Agency has confirmed the names running its structured finance team hierachy. The managers for the respective asset classes are: Eric Thompson in CMBS and RMBS; Anthony Nocera in commercial ABS; Rosemary Kelley in consumer ABS; and Andrew Guidici in project finance and energy. All will report to KBRA president and coo Jim Nadler.

Structured Finance

ABL team recruited

Texas Capital Bank has recruited Chris Capriotti, Jeff Tompkins and Olivia Pipitone to take on responsibility for expanding its asset-based lending (ABL) practice. Capriotti will lead the group, succeeding Ed Franco, who retired last month.

The team was formerly with JPMorgan. Capriotti and Tompkins spent 20 years and 16 years respectively with the firm, focusing on ABL.

Structured Finance

BNP picks up duo

BNP Paribas is continuing to reshape it securitisation team in Europe with the additions of Bilal Husain and Simon Jones. The pair join the bank's new asset finance and securitisation (AFS) division, with Husian taking the role of head of EMEA AFS syndicate and Jones head of residential mortgage and consumer origination and structuring for EMEA AFS.

The duo arrive from Deutsche Bank, where Husain was director and head of ABS syndicate, while Jones was head of European mortgage finance and ABS capital markets. The former has also been a senior member of JPMorgan's securitised products group.

CDO

Soloso sales underway

Wells Fargo - as trustee for Soloso CDO 2005-1 - has conducted a series of public and private sales of portfolio collateral, in accordance with a New York Court order and pursuant to directions received from Lansuppe Feeder as requisite noteholder. The sale of 43 assets resulting in liquidation proceeds of US$159.05m has been settled.

The proceeds are being held in escrow, pending further order of the New York Court on the merits of an intervenor cross-motion for summary judgment. The move follows Lansuppe Feeder's filing of a trust instruction proceeding on 5 September 2015, naming the trustee and the issuer as defendants, in the US District Court for the Southern District of New York.

In the complaint, the plaintiff identifies itself as constituting the requisite noteholder, seeking a declaration that the trustee is obliged to comply with its August 2015 direction to liquidate the trust estate following the occurrence of an EOD. The plaintiff also seeks an order providing that the court's judicial construction shall be binding on all noteholders and the trustee, and that the trustee shall not be liable to any noteholder or third party for complying with the terms of the Court's order.

On 5 October 2015, Oxford University Bank, Citizens Bank & Trust Company, Coastal Commerce Bank, Guaranty Bank and Trust Company, Bankfirst Financial Services, The First - A National Banking Association, Copiah Bank National Association and PriorityOne Bank filed a motion to intervene and stay or dismiss the action in favour of an action pending in Mississippi involving claims that relate to those asserted by the plaintiff. The intervenors also filed a cross-motion for summary judgment, seeking a finding that the issuer was required to register as an investment company under the Investment Company Act. The New York Court is yet to indicate when it will rule on the cross-motion.

The New York Court on 26 October granted the plaintiff's motion, in part, and directed the trustee to proceed with the liquidation of the trust estate as directed by the plaintiff in accordance with the provisions of the indenture. The New York Court further ordered that the liquidation proceeds are to be held by the trustee in escrow, pending a further order on the merits of the intervenors' cross-motion.

The trustee will provide additional disclosures in respect of the disposition of the remaining portfolio collateral as appropriate.

CLOs

Leveraged finance heads appointed

Goldman Sachs has appointed Dominic Ashcroft and Luke Gilliam as co-heads of leveraged finance capital markets in EMEA. Both were previously mds in the bank's leveraged capital markets team and are based in London.

Risk Management

OTC expert hired

CloudMargin has recruited Lee McCormack as head of product strategy for its London headquarters. The firm says it will utilise McCormack's experience in OTC trading, clearing and settlement. His previous experience includes senior roles at Nomura, Morgan Stanley and UBS, with a focus that includes derivatives.

CloudMargin has also brought in Lisbeth Hadingham as sales vp for North America. Based in the firm's New York office, she joins from FIS, where she was responsible for many of their new client installations.

RMBS

Call for claims issued

The administrator of the Credit Suisse Bulk Settlement Practice (BSP) Fair Fund has called for eligible claimants to submit a proof of claim form by 15 November 2016. Preliminary distribution calculations will then be made for all eligible claimants in each harmed RMBS trust on a pro-rata basis, determined by the claimant's investment in the harmed trust divided by the sum of all claimants' investments in the harmed trust.

The BSP fund was created for the disgorgement, interest and penalties paid by Credit Suisse, following the US SEC's cease-and-desist proceedings against Credit Suisse Securities (USA), DLJ Mortgage Capital, Credit Suisse First Boston Mortgage Acceptance Corp, Credit Suisse First Boston Mortgage Securities Corp and Asset Backed Securities Corporation (SCI 19 November 2012). The respondents have paid disgorgement of US$55.75m, prejudgment interest of US$13m and a civil penalty of US$33m, for a total of US$101.75m to be distributed to harmed investors.

The SEC's findings involving the BSP - whereby respondents entered into a number of financial settlements with loan originators related to early defaulting loans that it had previously sold to RMBS trusts it sponsored, then kept the proceeds of those settlements without notifying or compensating the RMBS trusts that owned the loans - relate to 75 RMBS offerings underwritten by Credit Suisse from 2005 to 2007.

RMBS

REIT cuts securitisation business

The board of directors of Two Harbors Investment Corp has approved a plan to discontinue the company's mortgage loan conduit and securitisation business, with the wind-down process expected to be substantially completed this year. The decision has been taken as a result of challenging market conditions and an intention to reduce operating complexity and costs.

"I am extremely proud of the efforts of our team since embarking on this initiative in 2011, as the company was able to build out a best-in-class infrastructure, develop a high quality network of mortgage loan originators and establish Agate Bay Mortgage Trust as a well-respected securitisation platform," says Thomas Siering, Two Harbors' president and ceo. "However, we believe that current and expected mortgage market conditions and competitive pressures will prevent us from growing this business to a scale that meets our long-term goals and financial expectations. While the decision to exit this business was difficult, we believe it is in the best interest of our shareholders."

ABS

'Watershed' securitisation facility closed

Sun Life Assurance Company of Canada, Securcor and Blue Bridge Finance have closed a private securitisation facility for US$40m between Blue Bridge SPV Funding I and Securcor. The facility will be funded by Sun Life.

The securitisation facility will allow Blue Bridge to expand market share and represents a watershed event for the firm as it allows it to migrate to a portfolio lending model. It will also expand the presence of Sun Life and Securcor in the US equipment finance sector. The facility is backed by commercial equipment loans originated by Blue Bridge.

"Sun Life's US strategy is focused on originators with experienced management and prudent lending practices. We look forward to a long and mutually beneficial relationship with Blue Bridge," says Neil Cameron, senior md and head of private securitisation finance at Sun Life Investment Management.

ABS

FFELP criteria updated

Fitch has published its revised criteria for rating US FFELP student loan ABS. The main changes to the criteria are revised assumptions and stresses for deferment, forbearance, IBR, default timing and prepayments for both new ratings and surveillance. In addition, the new surveillance approach introduces rating tolerances based on time to maturity.

Based on additional analysis and feedback received during the comment period of the exposure draft, Fitch has modified certain assumptions and stresses compared to those in its original proposal. Among these modifications is the implementation of annual declines in the deferment stress for the maturity scenario and forbearance stress for the credit, base case and maturity scenarios. Loan forgiveness for loans in the income-based repayment programme is also allowed, beginning in 2036 until 2041.

Additionally, a constant default rate approach for the maturity scenario for new ratings and surveillance, a conditional payment rate stress according to the rating category for the credit stress scenarios, and rating tolerances of one to two categories up to either double-A or single-A (compared to the single-A cap in the original proposal) - depending on the time to maturity in the surveillance process - have been applied. The likelihood of an EOD occurrence in determining the ratings of other senior bonds will also be evaluated.

Fitch says that it will now use its proprietary cashflow model to assign final ratings to new transactions.

Over the coming months, the agency will review all FFELP ABS transactions - including those not on rating watch negative - using the revised methodology and will take appropriate rating actions. As well as model results, it will consider additional factors, such as remaining time to maturity, payment trends and sponsor support.

ABS

Card ABS metrics normalising

US credit card ABS performance is beginning to normalise from historical lows following a gradual shift up in metrics, says Fitch. Modest performance deterioration had been anticipated and remains within expectations, while overall borrower credit profiles are continuing to improve, leaving any imminent impact to outstanding ratings a very remote possibility.

A combination of rising consumer revolving debt and a general softness in the economy has had little material effect on performance so far. While overall consumer credit reported by the US Federal Reserve grew at a seasonally adjusted annual rate of 6.25%, with revolving credit increasing US$48.8bn, job growth has strengthened borrower positions. The most recent four-week average jobless claims reported by the Bureau of Labor Statistics were lower at 253,000, nearing a 43-year low.

Meanwhile, credit card delinquencies continue to stay just above near-record lows. Over the past 12 months, payments 60 days past due averaged 1%, according to Fitch's index. This performance indicates a low probability of charge-offs rising too rapidly any time in the near future.

The index results also show that charge-offs ended 2Q16 at 2.82% and 1H16 at roughly 6.5% higher than through the first six months of 2015. Any deterioration in underwriting standards could translate into weaker ABS metrics. However, Fitch notes that it is unclear whether the normalisation in charge-off rates is due to a shift in underwriting or a change in consumer's ability to repay loans.

Structured Finance

Korean issuance slows down

South Korean ABS issuance in 1H16 was down year-on-year by 43.9%, with a total figure of just Won27trn. According to the country's Financial Supervisory Service (FSS), the decline from Won48.2trn a year earlier was due to the Korea Housing Finance Corporation (KHFC) scaling back on its MBS issuance.

The KHFC issued Won14.6trn for the first half of the year, down 60.7% (Won22.5trn) from the same period in 2015. This is in contrast to ABS issuance by financial companies, which actually rose 6.5% from a year earlier to Won7.7trn, and non-financial companies' issuance with a 21.5% increase to Won4.7trn.

The FSS does note that the KHFC temporarily issued Won30.8trn of MBS backed by relief loans from May to July last year, Won27.4trn of which was issued by June. If this amount is excluded from the record for 1H15, this year's MBS issuance by the KHFC actually records as a 51% year on-year increase.

Finally, ABS backed by handset instalment sales receivables decreased by 8% from a year earlier. New demands decline as the smartphone market approaches maturity, which contributed to the decline in ABS issuance.

Structured Finance

APAC ratings supported

Fitch affirmed the long-term ratings on 131 Asia-Pacific structured finance and structured credit (SC) tranches in 2Q16. The agency also downgraded 10 bonds, while six were upgraded and one was placed on rating watch negative.

All of the downgrades involved Australian prime RMBS transactions that face concentration issues as the note balances reduce in size. The Flexi ABS Trust 2013-1 class E notes were placed on RWN in April 2016, due to disputed payments between the originator and one of the main vendors in the programme. The RWN was maintained in July.

The upgrades during the quarter involved four notes from the Australian prime RMBS, one SC transaction and one Chinese ABS note. The RMBS and ABS transactions all benefit from strong asset performance and increased credit enhancement. Meanwhile, the underlying collateral issuer in the SC transaction was upgraded, resulting in a similar rating action on the SC note.

Of the affirmations, 82 involved RMBS backed by Australian or New Zealand properties and 26 involved Australian or New Zealand ABS. Elsewhere, ABS ratings in Thailand (one), India (five), Singapore (five) and China (one) were affirmed, together with CMBS ratings in Thailand (five) and RMBS ratings in Japan (six).

At end-2Q16, most long-term ratings in APAC had stable outlooks. The exceptions were one positive outlook on a SC rating and the RWN on Flexi ABS Trust 2013-1.

Asset performance in Australia - the largest contributor to APAC SF rating movements - remained strong in Q2, with continuing strong property prices and low interest rates.

Structured Finance

Green bonds surging

Global green bond issuance rose in 2Q16 to a new quarterly high of US$20.3bn, US$3.4bn more than the 1Q16 figure of US$16.9bn. Moody's says that green bond issuance stood at US$37.2bn for the first six months of 2016, an 89% increase from the same period in 2015.

"The global green bond market is now poised to reach US$75bn in total volume for 2016 and so set a new record for the fifth consecutive year, given the strong issuance already observable in the first two weeks of Q3," says Henry Shilling, a Moody's svp. "At the time of our Q1 report, we had thought that the market could potentially reach US$70bn, well above last year's record of US$42.4bn."

Issuance for last quarter also revealed a more balanced profile compared to a first quarter dominated by Chinese issuance. In 2Q16, the US - helped by municipal sector activity - led with 22.8% of issuance, followed by supranationals and development banks at 16.7%, and the Netherlands at 14.3%.

The number of issuers and transactions also increased, with 54 distinct issuers offering a total of 81 transactions, while average transaction size fell to about US$250m per tranche. Almost two-thirds of green bond proceeds were once again earmarked for renewable energy and energy efficiency projects, with approximately 61% of issuance by total dollar volume allocated to these two categories. The clean transportation category emerged as the third most popular option.

Triple-A rated transactions continued to dominate, but issuance also spanned the investment grade spectrum. Based on Moody's ratings, 97% carried investment grade ratings, while 43% were rated triple-A. The one speculative grade green bond was a US$500m Ba1-rated Banco Nacional de Costa Rica deal to finance renewable energy and clean water projects.

CLOs

Collateral management changes made

A trio of CLOs have amended their collateral management agreements following on from NewStar Capital's acquisition of Feingold O'Keeffe Capital last year (SCI 17 September 2015). The affected CLOs are Avery Street CLO, Emerson Place CLO and Lime Street CLO.

In each case: the cause event relating to the departure of NewStar's key personnel has been revised to add a new defined term "key persons event"; Ian O'Keeffe has been replaced as a key person by Timothy Conway; and a mechanic has been provided to change key persons with notice to noteholders. Moody's will not change its ratings at this time.

CMBS

Loan leverage stabilising

The credit profile of US conduit CMBS loans was substantially unchanged between the first two quarters of this year, according to Moody's. The agency reports that conduit loan leverage has plateaued at roughly its pre-crisis peak, as measured by Moody's loan-to-value (MLTV) ratio.

"With US commercial property prices flat for the past two quarters, stable underwritten LTV has resulted in a stable Moody's LTV," says Tad Philipp, Moody's director of commercial real estate research. "The credit enhancement levels we assessed for conduit transactions are also therefore largely unchanged."

However, the credit quality of loans and deals varied considerably during the second quarter, Philipp adds. Loans at the 95th percentile of leverage had a MLTV of about 140%, while those at the fifth percentile had a MLTV of about 90%. The most highly leveraged conduit loan pool of the 11 Moody's-rated transactions had an average MLTV of 124.6%, about 12 percentage points higher than the pool with the least leverage.

Pari passu loans made up about 42% of conduit/fusion collateral in Q2 and the collateral backing them was generally of higher quality than that backing other conduit loans. The MLTV of pari passu loans was on average three percentage points less than it was for other loans, in part because some pari passu loans had sufficiently low leverage to be individually credit assessed.

In 1H16, conduit issuance was about two-thirds its level in the same period last year, Moody's says. The balance of conduit loans outstanding peaked at more than US$700bn in late 2007, but now stands at just over US$400bn. The rating agency expects conduit loans outstanding to decline further before stabilising last next year, when loan maturities and originations should align more closely.

CMBS

Commerical loan originations rise

Commercial and multifamily mortgage loan originations pushed up by 17% in 2Q16 from the previous quarter, according to the Mortgage Bankers Association's latest results on the sector. However, the results were not drastically different from the same time last year, with just a 1% increase, while CMBS loan originations contrastingly dropped.

"Low interest rates combined with strong commercial property market fundamentals to further support lending and to keep overall borrowing levels on pace with last year's strong level," says Jamie Woodwell, MBA's vp of commercial real estate research.

2Q16 saw an 11% year-over-year increase in the dollar volume of loans for office properties, while there was a 9% rise for industrial properties and a 1% drop for multifamily properties. There was also a fall for retail properties from the same time last year, by 9%. However, the biggest drop came from healthcare property loans, with a 64% decrease.

Among investor types, the volume of loans originated for commercial bank portfolio loans increased by 33% year-over-year. In addition, there was a 17% decrease in CMBS loans. When comparing the results from 1Q16, originations for hotels saw the biggest spike at 26%. Healthcare dropped by 25%, while CMBS saw a 33% decrease among investor types.

Insurance-linked securities

AIR to model pandemic ILS

AIR Worldwide has been chosen by the World Bank Group to model its Pandemic Emergency Financing Facility (PEF). The launch of the mechanism was announced two months ago with the aim of using ILS to protect against future pandemics (SCI 23 May).

The PEF initiative seeks to help initiate the first-ever insurance market for pandemic risk, combining funding from both reinsurance and ILS. According to the World Bank, in the event of a disease outbreak, the PEF is expected to release funds quickly to countries and qualified international responding agencies.

The insurance window will provide up to US$500m in coverage for an initial period of three years for outbreaks that are most likely to cause major epidemics. Parametric triggers will determine when the money would be released, encompassing factors that include the size, severity and spread of the outbreak.

Doug Fullam, senior manager of life and health modelling at AIR, says: "Emerging infectious diseases pose some of the biggest threats to the life and health of people around the globe, and AIR models can help organisations anticipate the drivers of mortality and morbidity risk to facilitate optimal risk management, risk transfer and risk mitigation decisions to help them better prepare financially and, more important, on a humanitarian level."

AIR has recently expanded its Global Pandemic Model to include outbreaks of six additional diseases. The model now explicitly accounts for nine pathogens, including bacterial and viral diseases, in addition to previously modelled influenza, coronaviruses and filoviruses - including Ebola and Marburg.

NPLs

NPL policy options offered

The EBA says that the revival of the EU market for securitisation may widen the range of options that banks could consider for addressing their non-performing loans. In a new report on recent trends in asset quality across the region's banking sector, the authority stresses the need for supervisory guidance in tackling NPLs, particularly in collateral valuation and arrears management.

The EBA analysis is based on supervisory data on NPLs and forbearance (FBL) for over 160 EU banks. The report shows that despite improvements, NPLs remain high, and it sets out three key areas for improvement.

With an average ratio of 5.7% in March 2016, NPLs in the EU remain up to three times higher than in other global jurisdictions. The EBA found that while the definitions of non-performing assets and provisioning rules are now mostly aligned across the EU, significant differences remain in some of the key structural areas that affect banks' capacity to deal with NPLs.

Structural impediments include legal systems, the duration of court proceedings and tax regimes - which vary significantly across the EU - as well as the absence of a deep and liquid secondary market in NPLs. According to the report, the major impediment to reliable and fast insolvency procedures is the slow process and significant work-overload of some judicial systems, especially those with high NPL ratios.

The link between the expected duration of insolvency proceedings and coverage ratios seems to confirm that provisions strongly depend on collateral posted, recovery rates and the speed of the recovery process. Out-of-court restructuring of debt under judicial supervision could be an alternative path for many insolvent clients, but it is not frequently used.

The first policy option for removing/easing the impediments to NPL resolution highlighted by the EBA is the support of the ongoing supervisory work to push for improved provisioning and arrears management. The second area is to address structural issues, such as backlogs in judicial systems and processes, while the third area relates to the liquidity, transparency and efficiency of secondary market in loans to facilitate the disposal of NPLs.

"Enhanced transparency regarding the state of NPLs and real estate collateral valuation would contribute to a better understanding and pricing of the risks and, ultimately, facilitate the sale process and lead to lower discounts in secondary market transactions," the report notes. "The establishment of asset management companies - with or without public support - can also play a key role in resolving NPLs and is a key factor in price discovery."

Risk Management

RFC on ECL guidelines

The EBA has launched a consultation on draft guidelines on credit institutions' credit risk management practices and accounting for expected credit losses, which will run until 26 October. The guidelines seek to ensure sound credit risk management practices associated with the implementation and ongoing application of the accounting for expected credit losses.

High-quality and consistent application of the accounting standards is the basis for the effective and consistent application of the regulatory capital standards, the EBA says. The draft guidelines build on the Basel Committee's guidance on credit risk and accounting for expected credit losses published in December 2015.

A significant number of credit institutions in the EU apply the IFRS standards, which will eventually require the measurement of impairment loss provisions to be based on an expected credit loss (ECL) accounting model rather than on an incurred loss accounting model. The EBA guidelines would not prevent a credit institution from meeting the impairment requirements of IFRS 9; rather, these guidelines should be read as the supervisory approach to support the appropriate application of those standards.

The guidelines do not set out requirements regarding the determination of expected losses for regulatory capital purposes.

Risk Management

FRTB data initiative launched

ISDA has launched a new data standards project to help facilitate compliance with the Basel Committee's FRTB rules. The initiative aims to reach a common consensus on the interpretation of risk-factor modellability rules, as well as a shared set of business requirements to support risk-factor assessment and data capture.

It is in response to the FRTB rules stipulating that risk factors must meet certain requirements before they can be included in bank internal models. For example, a risk factor must have at least 24 observations per year, with a maximum period of one month between observations. An industry impact study conducted by ISDA and other industry associations earlier this year found that non-modellable risk factors could account for 30% of the internal models approach capital charge.

ISDA will establish a working group to lead industry efforts to develop standard data requirements. The group will engage with both data vendors and regulators throughout the project.

RMBS

Mortgage portfolio acquired

Delta Lloyd Leven has purchased a €500m portfolio of Dutch whole loans from Rabobank. The portfolio consists of individual residential mortgages with an average LTV of 80%.

The firm says that the transaction fits within its strategic asset allocation, as the portfolio complements its own origination of mortgages. The impact of the transaction on the Delta Lloyd's solvency ratio (SII SF) is negligible.

RMBS

GSE loan data released

Fannie Mae has released historical loan performance data in support of its reperforming loan securitisation programme. The data covers approximately 700,000 loans on the GSE's book that were modified due to delinquency.

This includes loans that are either current, delinquent or liquidated post-modification. "We are pleased to share this data, which will enable investors to better understand the expected performance of agency MBS backed by our reperforming loans," says Bob Ives, head of retained portfolio asset management at Fannie Mae.

RMBS

Single-family rents rising

Tenant demand for US single-family properties remains robust, with rent increases in securitised properties approaching 6%. According to Morningstar Credit Ratings' analysis over the last 18 months, rents rose for most properties in 23 single-borrower, single-family rental securitisations.

While deals backed by single-family rental properties have existed for less than three years, their performance so far has been in line with Morningstar's expectations. The rent boosts outpaced the year-over-year increases of three- and four-bedroom RentRange median rents for properties in similar MSAs. Morningstar says that the increases were likely due primarily to seasonality, particularly for vacant-to-occupied properties.

"This follows a common sentiment in the single-family rental market," the agency notes. "Anecdotal evidence suggests tenants prefer to move in the summer, in part because of milder weather."

In addition, it notes how property managers stress that tenants place importance on their preferred school districts. Tenants are willing to accept higher rental rates in the summer, possibly to move in time for the new school year, and renewing tenants will pay higher rental rates in the autumn - which could be due to their desire to stay in a school district.

The agency's study covered roughly 90,000 single family properties across nearly 100 MSAs.

RMBS

MSR portfolio sold

First South Bank has purchased a US$84.6m mortgage servicing rights portfolio from Freddie Mac and Fannie Mae. The portfolio comprises 452 high quality loans based in North Carolina. The purchase increases First South Bank's MSR book to approximately US$2.8m and also brings its total balance of mortgage loans serviced for others to approximately US$376.9m.

RMBS

Debut sale for structured loans

Freddie Mac has completed its first-ever structured loan sale following the auction of a US$198.9m pool of 846 seasoned loans. Chimera Investment was the winning bidder for the JPMorgan-serviced loans, marking the beginning of Freddie's expansion of its re-performing loan securitisation and NPL sales programmes.

The transaction is expected to settle in October, after Freddie began marketing the transaction to potential bidders on 24 June. The cover bid price on the pool was in the high US$70s.

The loans are now expected to be securitised by Chimera. Freddie will guarantee and purchase the senior tranches of the securitisation at par and may retain or sell the guaranteed senior tranches.

As part of the agreement, the first-loss subordinate tranche will be initially retained by Chimera. A requirement of the transaction is that the buyer of the loans, and therefore the subordinate tranche, has to be an investor with substantial experience in managing both 'high-risk' mortgage loans as well as in securitisations.

The collateral is comprised of seasoned option ARMs and loans originated as such, but have since been modified pursuant to a HAMP or proprietary modification. The majority of the loans have payment histories that are less than six months current or are moderately delinquent. The aggregate pool is geographically diverse and has a LTV ratio of approximately 70%.

Advisors to Freddie Mac on this transaction were Credit Suisse, JPMorgan and First Financial Network.

RMBS

CRT ratings bolstered

Fitch has taken various positive rating actions on 152 classes from 26 GSE credit risk-sharing (CRT) RMBS issued between 2013 and 2016. The agency reports that the reference mortgage pools of the affected deals have performed well to date, with no pool reporting more than 24bp of serious delinquency, as of the most recent remittance report.

The transactions under review include nine Fannie Mae Connecticut Avenue Securities (CAS) transactions, 15 Freddie Mac Structured Agency Credit Risk (STACR) transactions, one JPMorgan Madison Avenue transaction and one JPMorgan L-Street Securities transaction. Fitch has affirmed the ratings on 104 of the classes reviewed and upgraded 45 classes, while three have been marked paid-in-full. Further, 127 classes have a positive outlook, reflecting an increased likelihood of upgrades in the future.

The upgrades reflect improvements in the relationship of credit enhancement to expected pool loss since the prior review. Most of the classes positively affected by the rating changes are M1 classes and the majority of the upgrades are between one and three rating notches in magnitude, although M1 classes from three transactions were upgraded by more than three notches, reflecting Fitch's expectation that the notes will be paid in full within the next six months.

For M1 classes that were upgraded in this review, CE as a percentage of the remaining mortgage pool balance has increased between 38bp and 226bp since issuance, with an average increase of 92bp.

For five STACR transactions issued in 2014, M2 classes were upgraded between one and three rating notches. In these transactions, the M1 class has either already been paid in full (thereby allowing the M2 to receive principal) or the M1 class is expected to be paid in full in the near term.

For M2 classes that were upgraded in this review, CE as a percentage of the remaining mortgage pool balance has increased between 60bp and 158bp since issuance, with an average increase of 119bp.

Fitch notes that property values in the reference pools have benefitted from home price appreciation since issuance. Home prices have increased by 19% nationally and by 31% in California, for example, since 2013.

RMBS

Indian lending risks outlined

The underwriting practices of lenders will be vital to controlling credit risk in Indian affordable housing loans, reports Moody's. The agency explains that the underprivileged status of many borrowers under the initiative will present unique risks to RMBS.

The Indian government is seeking to increase home ownership among lower income earners in the country through an affordable housing scheme. These loans are typically taken out by first-time home buyers, who are often self-employed in small unregistered enterprises or work for small companies.

Many borrowers do not have previous banking transaction records and - for the self-employed - do not disclose their incomes or file tax returns. As such, Moody's explains that the formal documentation or records needed to verify income and the ability to service loans is absent.

This means that the underwriting practices of lenders - in this case, housing finance companies (HFCs) - is essential to controlling credit risk. HFCs are the main affordable housing loan lenders in India, as banks are reluctant to lend to the sector because of the lack of documentation, and some have started securitising their loans via RMBS.

The affordable housing loan market is forecast to grow between R4trn to R8trn (US$60bn to US$120bn) by 2022 from R593bn in March 2015, increasing the heightened implications from the risks. Affordable housing loans accounted for 14% of the total home loan books of HFCs, as of 31 March 2015.

"Some key credit considerations for HFCs when they originate affordable housing loans include income assessments and the quality of the construction firms involved when the loan is for the purpose of funding an individual's purchase of a home. Some HFCs prefer to extend loans to the specific building projects of construction firms that they have pre-approved," says Georgina Lee, a Moody's avp and research writer.

The agency adds that 'know your customer' (KYC) guidelines and procedures are the first point of operational and credit risk control for HFCs when underwriting affordable housing loans. KYC guidelines are set by the National Housing Bank to verify the identity of borrowers. HFCs follow the guidelines as an important initial step to compensate for the lack of borrower documentation.

HFCs also appraise the income of loan applicants and their ability to service a loan by conducting detailed field checks. This can entail a credit officer sitting in the business premises of the borrower to estimate the borrower's monthly income.