Contents

NPLs

NPL renaissance

€9bn Italian ABS provides fresh impetus

Banca Monte dei Paschi di Siena (MPS) announced last week that it plans to offload its entire portfolio of sofferenze (bad debt) loans into a securitisation vehicle. The move is a significant landmark in the recovery of the Italian non-performing loan ABS market, which the national government has worked hard to revive.

Banca d'Italia figures put total Italian NPL volume outstanding at €360bn, as of end-2015, over half of which were sofferenze. In fact, the NPL-to-total loans ratio was 18% - the highest in the EU.

The Italian government has been proactive in its attempts to alleviate the NPL burden on the economy. It has cleared the path for the state-supported, privately-owned Atlante fund, instigated the GACS guarantee (Garanzia sulla Cartolarizzazione delle Sofferenze) and put on the table the use of funds from the state-owned Cassa Depositi e Prestiti to recapitalise any bank shortfalls (SCI passim) - even in the face of state aid concerns from the European Commission.

The government has had some limited success so far. However, the scale of the MPS portfolio makes this latest development particularly significant.

Sofferenze are the worst of Italian banks' bad loans. The portfolio that MPS is proposing to securitise has a gross book value of €27.7bn, but will be sold to the SPV for 33 cents on the euro, resulting in a net book value and securitisation balance of €9.2bn.

A €6bn notional senior tranche is planned, which would benefit from the GACS scheme and eventually be sold to private investors. A €1.6bn mezzanine tranche will be sold to the Atlante fund and a €1.6bn junior tranche will be assigned to existing equity holders of MPS.

The junior note assignment will not take place on the MPS balance sheet because the NPL portfolio has to be derecognised to achieve balance sheet relief. MPS shareholders are understood to be receiving the junior notes for free, albeit just prior to a rights issue. It is not yet clear whether the junior notes will receive interest, but there could be upside if recovery collections exceed the securitisation balance.

"The combination of NPLs and securitisation sounds like a very toxic cocktail to most, but in our view, the structure could work," Rabobank credit analysts observe. However, they note that prior experience with Italian NPL securitisations - the first of which were issued back in 1999 - has been mixed.

The prospects for MPS's deal will depend on the type of NPLs, the collateral, the region and the structure of the securitisation, reckon the Rabobank analysts. The GACS scheme could also be fundamental to MPS's success.

Biagio Giacalone, head of the credit solutions group at Banca IMI, notes that there are several steps issuers must go through for their ABS to qualify for the scheme. "The first delicate step is to get an investment grade rating on the senior notes without considering the state wrap. Then banks need to derecognise the portfolio, meaning they need to sell enough junior/mezzanine notes to allow them to cancel the NPL portfolio from their balance sheet. Once again, junior investors are the key to the success of this market," he says.

Ugo De Vivo, of counsel at DLA Piper, notes: "The use of GACS [for NPL ABS] may be limited by the costs to be paid. Additionally, the process to enforce the GACS may be in certain cases longer than the market may expect: the minimum period of time for enforcing of the GACS is 120 days, and they cannot be enforced by the single senior noteholder but shall be requested by the senior noteholders acting jointly."

The use of GACS has been approved by the European Commission so long as the seller - in this case MPS - pays for the guarantee. The Rabobank analysts note that the fee is based on CDS contracts of Italian corporates with similar ratings to the senior tranche.

While the Italian government's low investment grade rating means there is unlikely to be much of a rating uplift on the notes as a result of the guarantee, GACS should make the investment more attractive for investors. The analysts say it might be possible to attach a zero risk weight, which would broaden the investor base and could attract demand from insurers.

Along with GACS, the government's other central pillar has been the €4bn-plus Atlante fund. Atlante is technically a private equity fund, but it exists to support Italy's banks, including by purchasing NPL securitisations at above the market price.

"Atlante is a closed-end fund participated in by private investors, as well as state-owned entities, the main focus of which is to support the capital increase of banks that need to raise capital. It can also invest 30% of its capital in NPLs, where it will invest in junior tranches or in certain cases mezzanine," says De Vivo.

The Rabobank analysts believe that - depending on the coupon of the mezzanine notes - there may not be much upside in the MPS securitisation for Atlante. By way of compensation for the risk the fund will be taking, equity warrants will be received in exchange, providing upside if MPS's share price rises. In the NPL ABS market, Atlante generally seeks an IRR of around 6%, which is around half the level that a typical private investor would require.

"The hope is that Atlante can boost interest in NPLs, but there is also the danger that it could create a docking of the price. So far, the market reaction appears to have been positive," says De Vivo.

Atlante's ability to boost NPL ABS has been hobbled by the necessity of using €2.5bn to take over two regional lenders. However, Atlante may only be the start, with the fund's remaining cash expected to be rolled over into a new fund - Atlante 2.

De Vivo notes: "The launch of a second fund similar to Atlante with a specific focus on NPLs has been announced." Atlante 2 is understood to have a sole focus on NPLs and will not be required to recapitalise Italian banks in the same way that Atlante was set up to do.

Whether that new fund will be enough to revive the NPL ABS market remains to be seen. While there have been concerns about the strength of investor demand for NPL ABS, Giacalone believes a more pertinent question is whether there will actually be enough NPLs to make ABS issuance worthwhile.

"Can Italian banks afford to sell sizeable portfolios without significant negative impacts on their P&L? To really attract interest of the senior investors, deals have to be sizeable in order to guarantee a certain liquidity of the notes," he says.

Giacalone continues: "Selling hundreds of millions of notes would mean disposing of billions of NPLs, but there is still a gap between book value of the NPLs and their potential market price. This argument is valid for senior investors; however, the real key for the NPL market are junior investors. And now their demand is strong."

The MPS securitisation can clearly play a role in kick-starting activity. However, for the market to come back strongly may well be dependent on the approach of the rating agencies.

"Like in every other asset class, rating agencies reviewed their criteria after 2008, but not a single rated NPL securitisation has been issued from 2007 in Italy - so there is big speculation about the credit enhancement needed to achieve an investment grade tranche. Most likely 2H16 will see the first rated deal on this market, but the real comeback - if any - will happen in 1H17," says Giacalone.

De Vivo agrees that the market will require change in order to move forward. He says: "Fixing the Italian market will take more than just the Atlante fund or the GACS guarantee. These need to work together, along with legislative changes, to boost the ABS market."

The MPS deal is due to launch towards the end of this year. Unlike previous NPL securitisations in the country, it will be subject to stricter significant risk transfer (SRT) rules under CRR. No time call will be allowed and ECB guidance states that a three-month notification period prior to closing is required in order to obtain the SRT recognition.

"This could potentially cause delays to the sale and is probably one of the reasons why the deal is scheduled to take place near the end of the year. Other reasons why it is taking longer is to structure the deal correctly and to find (and convince) investors for the senior notes," note the analysts.

They add: "MPS is clearly aware of potential hurdles in this process and, given that the derecognition of the NPL portfolio is the most important condition for the rights issue, it has reached an agreement for a potential bridge facility for the NPL portfolio." A consortium of banks will consequently take over the NPL portfolio on a temporary basis.

JL

CLOs

US CLOs still strong

The US CLO secondary market is still maintaining the strong activity levels seen since the Brexit vote back in late June.

"The market is very strong, with this continuing to centre on mezzanine where a real curve is developing," says one trader. "Sellers saw the strong execution in BWICs early in the summer and have found little reason to stop testing liquidity."

The BWIC calendar has consequently remained more active than usual for the summer period and is showing no signs of letting up. "The rally doesn't look like stopping for now - it will keep going as long as sellers see a potential strong bid to target," the trader says. "That's not to say there haven't been some DNTs, but the stuff that has been selling has been mostly at a good price."

There are ten BWICs on the US CLO calendar for today so far. The chunkiest of which is a three line $70m double-A auction due at 15:00 New York time. The list comprises: OCP 2013-4A, OCP 2014-3A and VENTR 2013-13A B.

None of the bonds has covered with a price on PriceABS in the past three months.

Secondary markets

US CLOs stay robust

The US CLO secondary market is maintaining robust activity levels so far this week after a strong July.

"It was actually the busiest month we have had for a long time, not just in CLOs but across a number of our fixed income desks," says one trader. "It may be surprising to some, but there were a variety of factors that probably played into it, including the volatility produced from Brexit."

The investor interest seen across the capital stack last month is still evident at the beginning of August too. "Most of the tightening is still happening further down the stack, however," the trader adds. "Demand is focused towards both new issue and seasoned pieces, with 2012 vintages a particular pull right now."

The trader notes that shorter dated paper is also continuing to attract investors. "They seem to be looking for pieces that have small reinvestment periods left, or even some of the more senior paper that is due pay-downs very soon and, subsequently, potential upgrades."

There are currently nine US CLO BWICs on today's schedule. The chunkiest of which is three line equity and triple-B combination due at 11:30 New York time.

The list consists of: $6.25m ICEC 2013-1A D, $52m INWD 2006-1A SUB and $16.5m MRNPK 2012-1A SUB. None of the bonds has covered on PriceABS in the past three months.

Structured Finance

SCI Start the Week - 1 August

A look at the major activity in structured finance over the past seven days. Print last week's news here.

Pipeline
The final week of July brought six new ABS deals to the pipeline, as well as two CMBS and four CLOs.

The ABS were: US$1.025bn AmeriCredit Automobile Receivables Trust 2016-3; US$250m MVW Owner Trust 2016-1; US$1.25bn Nissan Auto Receivables 2016-C Owner Trust; US$1.25bn Toyota Auto Receivables 2016-C Owner Trust; US$475.26m Utility Debt Securitization Authority Restructuring; and US$561.5m Wheels SPV 2 Series 2016-1.

£370m BAMLL 2016-ISQR and US$1.bn FREMF 2016-K56 accounted for the CMBS. The CLOs were US$411.5m Babson CLO 2016-II, US$612.32m Dryden 43 Senior Loan Fund, €1.75bn IM Sabadell PYME 10 and €647.77m Sinepia.

Pricings
Several deals also departed the pipeline. There were 10 ABS prints as well as three RMBS, two CMBS and five CLOs.

The ABS were: US$500m Barclays Dryrock Trust Series 2016-1; US$916m Castlelake Aircraft Securitization Trust 2016-1; US$190m Earnest Student Loan Program 2016-C; US$137m EDvestinU Private Education Loan Issue No.1; €1bn IM BCC Cajamar PYME 1; US$600m Kubota Credit Owner Trust 2016-1; US$1.01bn Navient Student Loan Trust 2016-5; €1.5bn SC Germany Auto 2016-2; US$480.55m SoFi Consumer Loan Program 2016-2; and €3.1bn UBI SPV Lease 2016-1.

€3bn BPCE Master Home Loans FCT 2016-01, US$2.645bn Chase Mortgage Trust 2016-2 and €703m SapphireOne Mortgages 2016-1 were the RMBS. The CMBS were US$264m COMM 2016-GCT and US$800m DBJPM 2016-C3.

Lastly, the CLOs were: US$409m Apidos XXIV; US$141m Ares Enhanced Loan Investment Strategy 20; US$406m ICG US CLO 2016-1; €454m Griffith Park CLO; and US$406m Park Avenue Institutional Advisers CLO 2016.

Markets
Buyers poured in to the US CLO secondary space last week, as SCI reported on Thursday (SCI 28 July). "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," says one trader. "The exception is the triple- to single-A range, where sellers are not really surfacing right now."

The European CLO market became much more fluid last week (SCI 28 July). "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," comments one trader.

European ABS and MBS secondary markets have quietened down (SCI 26 July), as flows have reduced and BWIC volumes have become subdued. There is a lack of volatility and the summer lull appears to have well and truly begun. However, one trader notes there have been 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," they say.

Editor's picks
Foreign policy: 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.
Auditing issues: Auditing the accuracy of a client's most complex fair value measurements is no mean feat. There are several factors that make the process more challenging, however. Top of the list is the ability to gain sufficient transparency into the assumptions used by firms that provide prices on subordinated and equity positions...

Deal news
• 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.
• 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.
• 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.
• 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.

Regulatory update
• 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. 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.

Deals added to the SCI New Issuance database last week:
Adagio V CLO; American Credit Acceptance Receivables Trust 2016-3; Apidos CLO XXIV; BBVA Consumo 8; BlueMountain CLO 2016-2; Capital One Multi-asset Execution Trust 2016-3; CARDS II Trust Series 2016-1; CAS 2016-C04; Chase Issuance Trust 2016-4; Chase Mortgage Trust 2016-2; CIFC Funding 2012-1 (refinancing); CPS Auto Receivables Trust 2016-C; Dryden 43 Senior Loan Fund; FCT Ginkgo Compartment Personal Loans 2016-1; Ford Credit Floorplan Master Owner Trust A Series 2016-3; Ford Credit Floorplan Master Owner Trust A Series 2016-4; FREMF 2016-KS05; FRESB 2016-SB19; Golub Capital Investment Corporation CLO 2016(M); Harvest CLO XVI; John Deere Owner Trust 2016-B; Jubilee CLO 2016-XVII; KKR Financial CLO 2013-2 (refinancing); Lanark Master Issuer 2016-1; Marlette Funding Trust 2016-1; Progress Residential 2016-SFR1 Trust; SMB Private Education Loan Trust 2016-B; SoFi Professional Loan Program 2016-C; Sound Point CLO XII; Triton Trust No. 7 Bond Series 2016-1; Volta IV; World Financial Network Credit Card Master Note Trust Series 2016-A

Deals added to the SCI CMBS Loan Events database last week:
CWCI 2007-C2; DECO 2007-5; DECO 2007-6; GSMS 2011-GC5; JPMCC 2010-C2; JPMCC 2012-CBX; UBS-Barclays 2012-C3; WBCMT 2004-C15; WBCMT 2006-C26; WBCMT 2007-C33

Structured Finance

MBS hedge funds rebounding

Preqin's 2Q16 Hedge Fund Survey shows that hedge funds in the credit strategy category experienced four consecutive quarters of outflows since the beginning of 2015, with about US$17bn of outflows in 2016 alone, mostly concentrated in Q1. A Wells Fargo analysis of the data suggests that amid this outflow, ABS-focused hedge funds saw declines in AUM in 4Q15 (by 6%) and 1Q16 (17%). In contrast, while MBS-focused fund AUM declined by 15% in 4Q15, it increased by 20% in 1Q16.

"We looked at hedge fund flows in light of reports that large insurance companies were exiting their hedge fund holdings," Wells Fargo structured product analysts explain. "In our view, the concerns regarding hedge fund redemptions are valid; however, the data we examined show outflows were strategy-specific."

Globally hedge funds manage about US$3.14trn in assets. Within the Preqin data, debt-focused funds are generally classified in the relative value strategy or credit strategy categories and account for 18% of the hedge fund universe.

Focusing on reported figures, the Wells Fargo analysts examined data extrapolated from 40% of the AUM within the credit strategy category and 22% of the AUM within the relative value category. The data shows that ABS and MBS funds respectively had US$5.6bn and US$37.3bn in AUM, as of 2Q16, representing about 3% and 17% of the total credit strategy category.

ABS hedge funds reported 2.1% year-to-date net returns, while MBS funds reported 0.3% YTD net returns, recovering losses of 1.3% from Q1. MBS fund AUM declined by about US$1bn in 2H15, after more than US$6bn of inflows in 1H15, but has recovered more than 60% of the 2H15 outflows YTD. However, ABS fund AUM continued to decline YTD.

The analysts note that overall credit strategy AUM remains at historically high levels, mostly driven by the strong growth in long/short and other fixed income credit funds. They suggest that AUM growth in long/short funds is due to the capital raised post-financial crisis to take advantage of distressed opportunities.

AUM in long/short funds that invest in corporate credit or structured products increased by 400% between 2010 and 2Q16, according to Wells Fargo. In comparison, the size of the corporate bond market increased by almost 25%.

"We expect structured products hedge funds to face headwinds from redemptions amid low returns. This dynamic may weigh on very credit-oriented bonds - which, in our view, could lag senior securities in the latest price recovery," the analysts conclude.

CS

CLOs

Tightest CLO for nearly a year

Babson Capital has brought its latest US CLO to the market, with the senior tranche pricing at the tightest spreads seen since September last year. Babson CLO 2016-II's class A notes were registered at 145bp last Friday, coinciding with the ongoing rally in the market.

"Babson is a fairly sought after name in the market," says one US-based trader. "So in that sense, it's not too surprising when you factor in the current tightening within US CLOs too."

The trader notes that it is tough to pinpoint a specific driver behind the price but says that recent strong demand likely played a significant contribution. "With the rally in the loan market, the arbitrage is not there for market players to be able to print deals that can hit the more profitable range in the 150s."

Moody's and Fitch have provisionally rated the deal, both assigning triple-A ratings to the US$252m class As.

JA

RMBS

Demand expected for jumbo Hawksmoor

Initial price thoughts have been released for the first post-Brexit UK non-conforming RMBS, Hawksmoor Mortgages 2016-1. At an expected £2.25bn, the deal is also noteworthy for its size, especially given the August print.

Hawksmoor 2016-1 is backed by a pool of first-ranking owner-occupied and buy-to-let non-conforming loans, secured by properties in England, Wales, Scotland and Northern Ireland. GE Money Home Lending originated 79.89% of the pool, igroup Mortgages 16.43% and GE Money Mortgage 2.36%. Of the collateral, 33.57% was originated in 2007.

The pool represents a portion of the Virage portfolio, which was acquired by Junglinster - a Blackstone, CarVal and TPG consortium - from GE in December 2015. The deal reportedly already has substantial lead orders across the capital stack, with books expected to go subject soon.

The deal's 2.5-year class A notes have preliminary triple-A ratings from Fitch, Moody's and S&P, with IPTs of three-month Libor plus 172bp. The three-year class B, C, D and E notes have respective preliminary ratings of Aa1/AA, A1/A+, Baa1/A- and Ba2/BBB- from Moody's and Fitch. IPTs for the B to D tranches are plus 300bp area, high-300s/400 area and high-400s/500 area.

Compared to generic pre-Brexit levels, the IPTs are around 25bp wider for the senior bonds and up to 50bp wider for the mezzanine bonds.

The capital structure also comprises an unrated three-year F tranche, as well as a Caa3 rated class X and unrated Z1 and Z2 notes.

Fitch notes that although the loans have nine years' seasoning, they are negatively selected from GE's overall portfolio of performing loans. The positively selected loans were previously sold and subsequently securitised in the Trinity Square 2015-1 and Trinity Square 2016-1 transactions.

Citi and HSBC are arrangers and joint lead managers on the deal. Deutsche Bank and Bank of America Merrill Lynch are also joint lead managers.

CS

Structured Finance

SF pro switches law firms

Latham & Watkins has hired Sanjev Warna-Kula-Suriya as a partner in the firm's corporate department. Based in their London offices, he will advise from a wide field of experience which includes CMBS, cash and synthetic CLOs, OTC and exchange-traded derivatives and cross-border structured finance.

Warna-Kula-Suriya also has significant expertise in the sale and purchase of financial asset portfolios, distressed investments and restructurings, and the establishment of alternative lending platforms and direct lending. He joins the firm from Slaughter & May, where he was also a partner.

Structured Finance

Scope supervisory board named

Scope Corporation has appointed a new supervisory board that comprises financial industry experts Martha Boeckenfeld, Georg Waldersee and Sebastian Canzler. They take over from Peter Gloystein, Hans Peters and Christoph Pape.

The latter three will still support Scope as members of its advisory board, with Gloystein continuing as chair. The supervisory board meeting yesterday led to Boeckenfeld being appointed chair and Waldersee as deputy chair.

Boeckenfeld was until recently cfo of BHF-Kleinwort Benson Group and ceo of Kleinwort Benson Bank. Waldersee has previously been partner at both Arthur Andersen and Ernst & Young. Canzler has been at Scope in a number of capacities, focusing primarily on M&A, as well as supporting the acquisition of FERI EuroRating as an advisor (SCI 30 June).

CDS

Tullett buys broking business

Tullett Prebon is set to acquire Creditex's US hybrid voice broking business from Intercontinental Exchange. This includes a team of 14 brokers in New York specialising in hybrid voice broking and trading services for credit derivatives. Tullett Prebon also expects to acquire the ICAP global hybrid voice broking and information business later this year.

CDS

OTC legal expert poached

Gibson, Dunn & Crutcher has recruited Carl Kennedy as of counsel in its New York office. He joins the firm's financial institutions practice group and will provide advice to clients on regulatory, legislative and investigative issues relating to commodities and derivative markets.

He joins from JPMorgan, where he was an executive director and assistant general counsel. In this role, he advised on the implementation of Title VII of the Dodd-Frank Act regulating swap markets. Before that, he was a special counsel and policy advisory for the US CFTC.

CLOs

Leveraged finance team recruited

Allen & Overy has hired a team of five New York-based leveraged finance partners. The team is led by Scott Zemser and includes Alan Rockwell, Rajani Gupta, Judah Frogel and Todd Koretzky.

Zemser, Rockwell and Frogel join from White & Case, while Gupta and Koretzky arrive from Milbank, Tweed, Hadley & McCloy. The team will assist both domestically and internationally in representing banks and other financial institutions as lead arrangers, underwriters and participants across all types of financings. It will also advise clients on complex debt restructurings and workouts.

Zemser and Rockwell will provide their experience from a range of areas that include structured finance, asset-based lending, real estate finance and secured high yield debt securities.

CLOs

Global development head hired

Tetragon subsidiary, LCM Asset Management, has brought in Chris D'Auria to run its global business development efforts. The firm says it will look to utilise his skills to expand its global outreach and tackle the changing regulatory landscape in CLOs.

D'Auria joins from Deutsche Bank, where he was md and co-head of the bank's global CLO business. His experience has seen him involved in originating, structuring and marketing CLOs, including advising on M&A transactions.  

Insurance-linked securities

Parametrics firm names ceo

Global Parametrics has appointed Hector Ibarra as its ceo. Ibarra will lead the new company, which targets parametric and index-based risk transfers to firms and organisations with unprotected exposure. He joins from the World Bank, where he was lead financial officer. Prior to that, he was avp for PartnreRe, focusing on a variety of areas within ILS.

Insurance-linked securities

ILS pro takes new role

The former head of international capital markets at Aon Securities has moved on to RenaissanceRe, where he has become an md in the Ventures unit. Based in Bermuda, Chris Parry started in the new role this month.

Parry spent seven years at Aon and previously worked at Dresdner Kleinwort, Citi and BDO. He has deep experience in structured finance and credit derivatives. RenaissanceRe's Ventures unit manages third-party capital, ILS fund and joint venture initiatives.

RMBS

MBS vet joins Nathan Hale

Nathan Hale Capital has boosted its capital markets division with the appointment of Kurt Weisenfluh. He is tasked with expanding the firm's presence in the RMBS market.

Weisenfluh has more than 25 years of industry experience and was previously a risk management consultant for Newbold Advisors. He has also worked as md for BlackRock, head of mortgage trading for Barclays Global Investors and fixed income trading director for Merrill Lynch.

ABS

Spanish crowdfunding gets green light

The official registration of the first equity crowdfunding platforms in Spain last week presented further regulatory inroads for marketplace lending in Europe and could also be an additional boost for Spanish SME ABS. According to Moody's latest Credit Outlook, a further 10 platforms are also believed to have obtained registration at the end of July following the announcement on Wednesday.

Spain's stock market regulator, CNMV, will regulate the platforms. In cooperation with the Bank of Spain, it will also monitor their activity as per Law 5/2015, which adds increasing transparency to the space.  

Seven of the first platforms to gain operation authority specialise in SME funding. Moody's says that new sources of funding such as this can help SME ABS credit quality by reducing the dependence on bank credit. Diversification and funding alternatives will also help SME borrowers in existing ABS transactions to refinance.

This is seen as an encouraging step for the growth of crowd-sourced lending, which should continue to be driven in Spain by individual investors tapping the funding of small businesses. Marketplace lending could continue to benefit if further disintermediation sees the market share of Spanish banks in SME funding further erode over the next 10 years.

ABS

US ABS issuance booms

Variability in US ABS new issue volume over the last 12 months has reached its highest level in the post-crisis period, after over US$3bn of new deals priced last week. As US$21.8bn of issuance, July was the busiest month since 2009, when TALF was still in effect.

Year-to-date issuance is now up to US$110.6bn, according to Wells Fargo figures, gradually closing the issuance gap between this year and last year. 2016 issuance is US$6.3bn behind 2015's pace, although it could wane late in the year as the date for Reg AB2 loan-level disclosure compliance and the US election each loom.

ABS

Colombian ABS risk highlighted

The liquidation of non-bank financial institution (NBFI) Estraval and the losses related to privately sold pools of payroll deductible loans (PDL) with recourse to Estraval highlight risks risks potentially facing the Colombian consumer ABS market, says Fitch. The rating agency believes these risks include the limited regulation of Colombian NBFIs and risks to underlying PDLs, such as borrower unemployment, life insurance settlement misuse and prepayments.

"Colombia's Superintendencia de Sociedades forced Estraval to liquidate after it became clear that Estraval had double-pledged portfolios of PDLs, which were underperforming due to borrower unemployment, life insurance settlements that were not used to pay off loan balances, and prepayments that were eating away at expected yield on the collateral. The double pledge was exposed after a rise in obligor delinquencies led to a cash shortage," notes Fitch.

PDLs are bank loans to individuals that are repaid by automatic deductions from the borrower's salary and have grown rapidly over the past three years as defaults rates are low and interest rates on the loans are high. The growth of PDLs has also contributed to the growth of NBFIs.

"Over the long term, a rise in unemployment is a risk for all pools of PDLs. As Colombia's recent growth has led to historical lows in unemployment rates, we do not expect this risk to materialise for some time," says Fitch. The rating agency's outlook for Colombian PDL securitisations is broadly stable.

ABS

Aussie metrics approach crisis levels

Delinquencies for Australian auto loan ABS and prime RMBS have risen steadily over the five months to May 2016, as well as year-on-year, notes Moody's. The auto loan delinquency rate is now similar to levels seen in 2009 and is edging towards its 2010 peak.

For auto loan ABS, 30-plus day delinquencies worsened from 1.35% in January to 1.66% in May. A year earlier they had been 1.29%.

For prime RMBS, arrears rose from 1.34% in January to 1.5% in May. They had been 1.4% a year earlier.

"Looking ahead, we expect that delinquencies for Australian auto loan ABS and prime RMBS will rise slightly over the remainder of 2016, because of below-trend nominal GDP growth," says Moody's vp and senior analyst Alena Chen.

ABS

PACE acceptance is 'ABS positive'

The Federal Housing Administration (FHA) and Department of Veterans Affairs (VA) are to being to insure mortgages on homes encumbered by PACE obligations that meet certain requirements. Moody's believes the FHA's acceptance of PACE is credit positive for PACE ABS and will have mixed effects on RMBS.

This is the first time that federal agencies involved in the US mortgage market will treat PACE assessments like real estate taxes. Delinquent PACE amounts will be allowed to have seniority of FHA/VA mortgages, which will be positive for ABS backed by PACE assessments and could have a mixed effect on some RMBS, says Moody's, although the effect on RMBS will be limited because so few homes currently carry PACE obligations.

"The FHA/VA decision lowers the risk that the two agencies will seek to impair PACE financings with legal challenges upon a foreclosure by arguing that PACE liens undermine the first-lien status of mortgages. Homes with FHA or VA financing represent 26%-28% of properties with PACE obligations in the 2015 and 2016 securitizations from the largest PACE ABS issuer," notes Moody's.

Improved mortgage financing availability for buyers of homes with PACE obligations and refinancing options for owners of such homes should also offer additional credit benefits for PACE ABS. Meanwhile, expanded mortgage financing for PACE-encumbered homes could have benefits for RMBS that are backed by mortgages on homes with PACE obligations, although risks in RMBS could rise if increased PACE volumes create more properties that have both securitised mortgages and PACE liens that rank senior to them.

ABS

MPL securitisations 'worth risks'

Marketplace lending continues to grow, but so too do delinquencies and losses. Morgan Stanley notes that marketplace lending securitisations can provide important structural protections to investors in the context of performance deterioration.

There has been a run of negative headlines for the marketplace lending industry and four securitisations have seen deterioration sufficient to breach triggers. While Morgan Stanley finds that deals are built with significant investor protections, the firm stresses that the sector is not without risks.

Marketplace lending securitisations have been structured to provide overcollateralisation in offered tranches at around 6%-15%. Senior tranches also benefit from subordination and all tranches benefit from a reserve account and excess spread of anywhere from 6%-25%.

Rating agencies have taken note of these protections and so far there have not been any downgrades among rated marketplace lending bonds. Moody's has actually upgraded a couple, while DBRS has upgraded three.

Throughout various scenarios, Morgan Stanley forecasts relatively stable yields across the capital structure. This is largely due to the short WAL of the bonds. For bonds to start taking losses, prepayment rates would need to slow down meaningfully while default rates escalate rapidly.

However, there are still many risks. Investors are exposed to falling prepayment rates and rising default rates.

"These platforms have not been tested in a recessionary environment, and thus have limited performance history, particularly with respect to where unsecured consumer loans would fall on borrowers' payment priority list," says Morgan Stanley. "For investors who can stomach the risks highlighted above, marketplace lending securitisations offer attractive short duration spread pickup opportunities, particularly significant in an increasingly low return investment environment."

Structured Finance

Specially serviced loans increase

Moody's reports the share of specially serviced US conduit CMBS loans increased by 82bp to 6.86% in 2Q16 from 6.04% the previous quarter. However, this share remains 586bp below the April 2011 peak of 12.72%.

The share of delinquent loans rose to 4.6% from 4.4% the prior quarter too. Moody's commercial mortgage metrics weighted average base expected loss consequently rose to 4.6% in the second quarter from 4.3% in the first.

However, US CRE was boosted by a small drop in vacancies in the retail segment for 2Q16, with office and multifamily vacancies continuing to trend down. The drop in vacancies for the office sector was driven by suburban office at a 20bp decrease, while central business district office vacancies rose by 10bp. In addition, hotel space is still outpacing demand, but the pace is slowing.

Meanwhile, Moody's notes that it has withdrawn the ratings on five CRE CDOs/CLOs in the second quarter as a result of either full redemption or repayment of one or more outstanding rated notes. The agency also reports that early termination resulted in 100% realised losses to one or more rated notes.

Structured Finance

Bail-in clause concerns raised

AFME has published model clauses for the contractual recognition of bail-in for the purposes of satisfying the requirements of Article 55 of the EU Bank Recovery and Resolution Directive (BRRD). The association says that these clauses seek to support cross-border effectiveness of resolution and assist banks with complying with the requirements by providing model wording for inclusion in debt instruments and other contracts.

However, AFME has continued concerns about the scope of Article 55 of the BRRD. Oliver Moullin, head of recovery and resolution and general counsel at AFME, says: "Very significant challenges remain and the scope of Article 55 should be amended to align it with the international standard, increasing consistency and clarity for the market."

AFME believes the scope of Article 55 is very broad and it will not always be practical to include in contracts the clauses required by the directive. With the potential for inconsistent application across the EU, AFME is calling for a clear and workable solution to be provided and believes that the scope of Article 55 should be amended to align it with that agreed at the international level through the Financial Stability Board.

CDS

CDS platform launches

ICE has launched a new platform for trading cleared single-name CDS in a central limit order book. ICE Swap uses the electronic trading technology of Creditex to consolidate orders from both buy- and sell-side players to create a liquidity pool for the derivatives product.

The platform is the first to include both anonymous and 'name give up' execution in the same order book, so participants can choose to reveal their identity after the trade is consummated. It also has full pre- to post-trade connectivity, including pre-trade credit checks and direct-to-clearing workflow. President of ICE Swap Trade, Krishan Sing, says that a number of trades have already been executed on the platform.

CLOs

CLO refinancing scenario RFC issued

Moody's has previously outlined proposed changes to how it examines refinancing scenarios in its rating analysis of combination securities secured by CLO or CDO debt tranches (SCI 22 April). In a supplemental request for comment, the agency now seeks feedback on how it will examine refinancing scenarios in the rating analysis of combination securities.

For CLOs evaluated any time between closing and one year after the end of their non-call period, Moody's says it will assume that refinancing occurs at the end of this period and will typically assign a 20% probability to the CLO refinancing scenario. For CLOs evaluated after the end of this period and up to the end of the reinvestment period, the assumption will be that refinancing occurs at the end of the reinvestment period, leading Moody's to typically assign a 10% probability to the CLO refinancing scenario.

CLOs evaluated after the end of the reinvestment period have been given a 0% probability for a potential refinancing. Approximately 14% of CLOs issued since 2008 that are eligible to refinance have refinanced some or all of their secured debt tranches. Close to 80% of those that opted for refinancing did so between the end of their non-call period and one year thereafter.

Moody's adds that where deal documentation allows for the refinancing of some of the underlying secured debt tranches of rated instruments, such refinancing can change the instrument's credit risk through the loss of future coupon payments from the refinanced debt tranches. Adding the refinancing scenario analysis will capture the combined effects of missing coupon payments of the refinanced debt tranches as well as the impact on the instrument's weighted average life/duration.

Under certain circumstances, the agency may adjust its assumptions on the probability of a refinancing up or down. This will be contingent on a consideration of factors such as market conditions and deal-specific features.

An adoption of the proposed changes will impact the ratings of combination securities that permit refinancing of their components. The agency says that those securities backed by CLOs issued since 2008 may be subject to potential downgrades of an average of two to three notches, while securities backed by CDOs or CLOs issued before 2008 will experience little or no change.

Moody's invites market participants to provide comments by 29 August.

CLOs

SME CLO leverage worsens

SME leverage has worsened since 2011, which is a credit negative for SME CLOs, says Moody's. The median total leverage for the 750 Moody's-rated US SME obligors in CLOs has increased to 4.6x in 2015 from 4.0x in 2011, leading to a deterioration in SME borrower credit quality.

Although leverage increased only slightly among the 124 unique SME obligors in CLOs for where Moody's assigned credit estimates to assess their credit quality in both 2011 and 2015, the average rating factor worsened to 3964 from 3729. The average rating factor worsened by 503 points for the 74 obligors whose total leverage increased, and improved by just 161 points for the 50 obligors whose total leverage decreased.

Based on the 124 obligors, median leverage increased between in the four-year period in technology, manufacturing and consumer durables. In contrast, the median leverage decreased for two of the industries represented in SME CLOs - business and consumer services, and retail.

CLOs

CLO pay-downs surge

The number of CLO pay-downs in JPMorgan's CLO index (CLOIE) since the June rebalance through 31 July was US$6.79bn in par outstanding, up dramatically from US$1.45bn the previous month. This was split between US$2.05bn and US$4.74bn of pre-crisis and post-crisis CLOs respectively.

The post-crisis CLOIE added US$4.4bn with 61 tranches across 11 deals at the June rebalance. Meanwhile, all CLOIE sub-indices experienced spread tightening and positive total returns last month, as the market experienced a post-Brexit rally.

The post-crisis index return was +1.68%, outperforming the pre-crisis returns of +0.75%, as well as broader market returns for high yield loans (+1.39%) and high grade bonds (+1.36%). Pre- and post-crisis discount margins tightened across the capital structure ranging from 17bp to 141bps, with more pronounced movements in mezz of the post-crisis index.

CLOs

Better loan prices soften CLO blow

Improving oil and gas loan prices last quarter helped to mitigate the impact from default and triple-C haircuts in US CLOs with exposure to the sector, according to Fitch's latest US CLO index. Average senior OC ratio and par gain declined at a slower pace than in the previous quarter, while exposure to defaulted issuers decreased from 1.1% of the index portfolio to 0.4%.

The decline in defaulted exposure resulted from several previously defaulted borrowers emerging from bankruptcy. The reversal of defaulted classification of Murray Energy and the addition of newer CLOs with less seasoned and healthier portfolios also contributed.

US CLO exposure to Fitch's loans of concern inched up from 4.9% to 6.4%. "This could be a harbinger that the slowdown in declines of some performance metrics may be a short-lived trend, especially if loan prices retreat from the recent gains," notes Fitch.

CLOs

CLO rating upgrades continue

US CLO rating movements held steady in 2Q16 despite default pressures, according to S&P. Upgrades dominated the rating action count, with a total of 141 across 29 transactions.

The agency says that liability pay-downs continued for 1.0 deals and some of the earlier 2.0s. 67 ratings were raised across 25 reinvesting CLOs as these deals saw below-average deterioration in credit quality and are also approaching the end of their reinvestment periods.

Meanwhile, S&P also placed nine ratings from seven CLOs on credit watch with negative implications and downgraded 13 ratings from six CLOs. US corporate speculative-grade downgrades outpaced upgrades by a multiple of about three in 1H16, while the trailing one-year corporate speculative-grade default rate rose to a new high. This is expected to rise further over the next 12 months due to potentially more interest rate increases by the US Federal Reserve, financial market volatility abroad and low price levels for oil and other commodities.  

During this time, reinvesting CLOs' exposures to assets rated triple-C plus and below increased by about 2% on average. This credit deterioration led to average subordinate overcollateralisation ratios declining by just under 1% on average, leaving an average subordinate cushion of just under 4% at the end of June.

CMBS

Watershed US CMBS deal prepped

The first CMBS to include a retained interest intended to meet the definition of an eligible vertical interest under US risk retention rules has hit the pipeline. The US$870.6m WFCM 2016-BNK1 will be issued with sponsors Wells Fargo, Bank of America Merrill Lynch and Morgan Stanley retaining a combined 5% vertical slice in the deal.

US risk retention rules come into force on 24 December and will require a securitisation sponsor to retain a minimum 5% interest in a transaction, either through a vertical, horizontal or L-shaped combination. While Kroll Bond Rating Agency expects horizontal retention to ultimately prove most popular, this deal will provide the market with a much needed example of a vertical risk retention execution and provide market constituents and regulators with time to provide feedback and learn any lessons from the structure.

To satisfy European risk retention rules, there are also "provisions to ensure that a sufficient amount of the underlying collateral acquired by the issuer as of the closing date will have been either originated or seasoned by the mortgage loan sellers or their affiliates," notes Fitch. Fitch and Kroll have both provisionally rated the A1, A2 and A3 notes at triple-A.

CMBS

CMBS 2.0 maturity defaults spike

US CMBS 2.0 loans saw a substantial rise in maturity defaults during the first half of 2016, reports Fitch. Across the 2010-2016 vintages, 32 loans totalling US$302.1m defaulted, which is up from just eight loans totalling US$69m during the same stretch the previous year.

The increase was driven by loans with exposure to oil and gas, including properties in Houston. There was also a strong contribution from the Bakken and Eagle Ford shale formations, where local employment is highly dependent on oil and gas exploration.

The loans are part an overall US$1.44bn in newly defaulted loans for 1H16, spread across 106 loans. The five largest defaulted loans were: the US$150m James Center loan in Richmond, Virginia; US$116.6m for the Fair Lakes Office Park in Fairfax, Virginia; US$68m in Minneapolis Airport Marriott in Bloomington, Minnesota; US$55.9m DHL Center in Breinigsville, Pennsylvania; and the US$46.2m loan for the Northwood Centre in Tallahassee, Florida.

The overall number of defaulted loans for CMBS were slightly down from 1H15, with saw 109 loans worth US$1.45bn defaulting. The figure was also below 2H15 figures, at 106 loans worth US$1.7bn. Office properties were the largest contributor to new 1H16 defaults by loan balance, with 29 loans comprising 40% of defaults, four of which were over US$20m.

CMBS

Hastings closures pose risks

The beginning of Hastings Entertainment's store closures are not expected to pose a major risk to CMBS, but 19 loans still pose some unwanted exposure, according to Morningstar Credit Ratings. This batch of small loans come to a balance of US$253.9m, with only one exceeding US$19m.

Although the impact is not expected to be profound, Hastings is a large tenant at most properties, occupying at least 20% of the gross leasable area in eight loans. Morningstar says that its departure would push occupancy below 80% on 12 loans. Adding to the risk, nine of the loans are set to mature in the next year, so there is limited time to re-lease the space during their loan terms.

The liquidators which bought the multimedia company's assets announced that sales would begin at all of the retailer's properties on 23 July, just a month after the company filed for bankruptcy protection. Most of these stores are in secondary and tertiary markets, which may make it more difficult to backfill the space after Hastings leaves.

Morningstar identifies the Missoula Staples/Hastings Entertainment loan backed by a 47,124-square-foot shopping centre as a particularly high risk loan, which was originally 97% leased to Hastings and Staples. "According to the special servicer, Staples vacated in June 2015, dropping occupancy to 55.7% and the DSCR to 0.72x as of April 2016," the rating agency says. "Hastings departure would have dropped the vacancy to 3%; however, according to the servicer, a new tenant signed a lease for the Staples space and began paying rent in July 2016, bringing occupancy without Hastings to 47%."

Loans with upcoming maturity dates could also be problematic, with the US$3.7m loan on the Eastgate Shopping Center in Boise, Idaho, as one such example. Placed in Merrill Lynch Mortgage Trust Commercial Mortgage Pass-Through Certificates Series 2007-C1, the loan has a DSCR of 1.08x as of year-end 2015 and is set to mature in July 2017. Occupancy at the property has remained low since 2011, with Hastings' departure pushing occupancy down to 60%.

CMBS

Brexit CRE impact gauged

The UK's vote to leave the EU will be negative for the country's CRE market and, subsequently, UK CMBS transactions, reports Moody's. UK CRE values could decline by up to 10%, depending on the property type, quality and location.

The figure is estimated by the agency from a base case scenario with a new UK-EU trade agreement and UK GDP growth of 1.8% in the long run. The CRE market is currently suffering, however, from uncertainty over the relationship between the UK and the EU, leaving delays in investment decisions and increased property risk premium.

If London were to lose its 'safe haven' status with foreign investors, Moody's says it is likely that transaction volumes as well as property values would fall. Over the last two years, foreign direct investment has accounted for over two-thirds of all CRE transactions in central London, according to CBRE.

Moody's adds that any negative investment sentiment from Brexit would impact secondary quality property and potentially lead to a flight to quality. The central London office market could particularly suffer the most due to the large presence of financial and professional service companies. Tenant demand would fall as the financial services industry will move a part of their operations to other locations within the EU.

While the immediate effect on UK CMBS transactions is expected to be limited, Moody's says that credit consequences could materialise over the medium term. However, this depends on the timeframe and outcome of the negotiations between the UK and the EU, as well as the different unique credit drivers for each transaction.

Specifically, the agency notes that Brexit is especially credit negative for transactions backed by loans secured by London office properties and transactions backed by loans with upcoming refinancing requirements. It is also detrimental for transactions rapidly approaching their note legal final maturity.

Nevertheless, Moody's says that there are various mitigating factors that can offset the negative impact of Brexit on CMBS transactions. These include low leverage, strong amortisation profiles, long leases to highly-rated tenants, long tenors leading to no short-term refinancing requirements and institutional quality sponsors.

CMBS

CMBS delinquencies move up again

Trepp's US CMBS delinquency rate moved higher for the fifth straight month in July to 4.76%, an increase of 16bp from June. The rate is now 61bp above its multi-year low of 4.15%, which was reached in February of this year.

In July, CMBS loans that were previously delinquent but paid off with a loss or at par totalled about US$950m. Removing these previously distressed assets from the numerator of the delinquency calculation helped move the rate down by 20bp. In addition, the overall delinquency rate for the month is still 66bp lower than the year-ago level and down 41bp since the beginning of the year.

A little over US$200m in loans were cured last month, which helped push delinquencies lower by another 4bp. However, almost US$1.8bn in loans became newly delinquent, which put 37bp of upward pressure on the delinquency rate. Also putting upward pressure on the number was a falling denominator - about US$3bn in loans were paid off, forcing the remaining delinquent loans to have an increased weight.

Further, the percentage of loans classified as 'non-performing' and 'past their balloon date' jumped by 11bp in July after moving up 14bp in June. These would be loans that reached their maturity date and did not pay off, and are part of the widely-anticipated maturity wall.

By property type, office still held the highest delinquency rate in July at 6.23%. Retail is at 5.76%, industrial at 5.63%, lodging at 3.12% and multifamily at 2.51%.

NPLs

Spanish NPL portfolios purchased

Bain Capital has acquired three Spanish NPL portfolios for €1.15bn, extending the firm's holdings to six Spanish portfolios. The purchases include a €415m pool from Banco Sabadell, which comprises defaulted first-lien bilateral Spanish loans to real estate developers, primarily secured on residential and commercial real estate assets.

The largest purchase is a €511m portfolio from Grupo Cooperativo Cajamar, which holds secured and unsecured defaulted bilateral and syndicated loans, mostly to real estate developers in various stages of bankruptcy. The loans are also primarily secured on residential and commercial real estate assets.

The other purchase is a €220m real estate assets portfolio from an unnamed 'major' Spanish bank. It comprises repossessed residential units and commercial real estate assets across Spain. Fabio Longo, md and head of Bain's European NPL and real estate business, says that further Iberian investments in this area of the market can be expected going forward.

Support in executing the deal was provided by Copernicus, Hipoges, Altamira, Aura REE and CBRE. J&A Garrigues and Cuatrecasas provided legal advice on the deals.

Risk Management

Leverage ratio recommendations made

The EBA has published its report on the impact assessment and calibration of the leverage ratio (LR), recommending the introduction of an LR minimum requirement in the EU. An LR requirement of 3% on the provision of financing by credit institutions would be relatively moderate, the EBA says, while still leading to more stable credit institutions.

The recommendation of a minimum LR requirement to mitigate the risk of excessive leverage is in line with discussions earlier in the year held by the Group of Central Bank Governors and Heads of Supervision (GHOS) (SCI 15 January). The EBA's report will inform the European Commission on potential LR legislative proposals.

The EBA's analyses suggest a 3% level for the LR would be sufficient to limit risk. The authority also found a high sensitivity to changes in the calibration of the LR and estimates that the potential reduction of exposures would increase significantly beyond a LR of 3.5%.

"The potential impact of introducing an LR requirement of 3% on the provision of financing by credit institutions would be relatively moderate. Similarly, on the basis of econometric analysis, it has been estimated that risk-taking should not be strongly affected. The introduction of a 3% LR should lead to more stable credit institutions overall and the combined application of a risk-based ratio and an LR requirement will reduce the overall cyclicality of capital requirements," says the EBA.

The EBA also notes that while the Basel LR standard is fitting well with the EU banking sector, care needs to be given to certain business models already covered by other EU prudential regulations. For example, it recommends exempting CCPs and central securities depositories.

Risk Management

Uncleared margining tool launches

ISDA and IHS Markit have teamed up to launch ISDA Amend 2.0. The free online service allows market participants to implement the new margining requirements for non-cleared derivatives, as well as inform counterparties about elections they have made under the ISDA Resolution Stay Jurisdictional Modular Protocol.

The updated service aims to help companies tackle the complex challenges and documentation involved with the global standards being set out for posting initial and valuation margin on uncleared derivatives. It was originally launched back in August 2012 for users of Markit's Counterparty Manager service to amend multiple ISDA Master Agreements and share regulatory representations. The service currently has subscribers from over 7,500 buy-side firms and corporates, representing over 60,000 legal entities.

ISDA and IHS Markit will host a webinar on 11 August to outline the functionality of the service. The service is the latest development by ISDA to assist in tackling new global margin requirements, which includes the ISDA 2016 Variation Margin Protocol. The protocol - available on ISDA Amend in October 2016 - provides scalable solutions to amend derivatives contract documentation with multiple counterparties.

Risk Management

Pay-outs prompt potential upgrades

S&P has placed 310 classes from 111 US RMBS deals on credit watch with positive implications. The transactions were all issued between 2004 and 2006, and reflect a potential increase in credit support to payments due as a result of Bank of America's US$8.5bn settlement with certain Countrywide RMBS investors (SCI passim).

Following an order from the New York Supreme Court, BNY Mellon payments to investors were finally realised in June. The distribution plan has prompted S&P to make rating movements that affect 48 subprime, 30 Alt-A, 22 prime jumbo, four negative amortisation, three re-performing, three document deficient and one closed-end second-lien transaction.

The agency will review the payment information and remittance report data on the transactions over the next few weeks and determine the degree of additional credit support, as well as any rating actions that should be received. The expectation is that the majority of the rating increases will be within one rating category. However, some ratings may experience ratings increases of greater than one category.

In addition, S&P may also place ratings on classes from 18 additional trusts. This is subject to the settlement's developments, particularly regarding when BNY receives judicial guidance as to how the settlement payments should be allocated for the transactions.

RMBS

RFC issued on PO strip ratings

S&P is requesting comments on its proposed approach for the surveillance of ratings on US RMBS principal-only (PO) strip securities backed by pre-2009 originated mortgages. No rating impacts are expected if the criteria were to come into place as outlined.

Historically, PO securities have been structured in various forms, with one such variety backed by discount mortgage loans whose coupons yield less than the weighted average coupon of a pool. They have generally been issued out of US RMBS senior/subordinate transactions as a way to maintain targeted interest rates on other securities within the transactions and have no interest due or payable, as they are only entitled to receive principal payments.

PO strip securities are part of the senior classes within a transaction. To the extent there is not enough principal available from the discount mortgage loans, the securities are entitled to any principal and potential interest collections from the non-discount mortgage loans after the other senior securities are paid what they are promised per the transaction documents.

Additionally, their entitlement to these collections typically takes over any subordinate bonds. Therefore, S&P says it will generally link the rating of the PO strip to the creditworthiness of the weakest principal and interest senior security.

S&P is inviting market participant to provide comments on its proposed methodology by 31 August.

RMBS

Loss risk improves for GSE CRTs

Expected mortgage losses on seasoned GSE CRT transactions are trending positively, says Fitch. The loss projections are driven by strong loan performance to date, a shorter loss exposure window until deal maturity and steady home price growth.

Coupled with bond deleveraging, the improvement in projected pool losses has resulted in positive rating momentum for the rated classes. Fitch has upgraded 45 CRT classes and a further 127 have a positive outlook.

RMBS

RMBS compare tool debuts

Fitch has introduced a data comparison tool for US RMBS, which encapsulates all of its US residential mortgage transactions issued since the start of 2012. The tool allows users to compare key credit attributes across transactions and issuers in an Excel format.

Transactions that are included in the report are US RMBS, GSE credit risk-sharing transactions and re-performing loan deals. The tool includes Fitch-projected mortgage pool loss and deal credit enhancement at each rating category.

Further, the tool includes a summary of over 20 collateral attributes, along with a distribution of due diligence grades provided at closing. The first presale report with a link to the tool can be found for the Agate Bay Mortgage Trust 2016-3 transaction.

RMBS

REIT reduces RMBS footprint

Five Oaks Investment Corp disclosed in its latest 8K filing that it has reduced the aggregate capacity of its repurchase agreement for the financing of residential mortgage loans with Barclays from US$150m to US$25m. The move is part of the REIT's plans to revise significantly its prime jumbo business, effective from 1 August.

Specifically, for the foreseeable future, Five Oaks will no longer aggregate mortgage loans and will securitise only on an opportunistic basis via transactions where it can concurrently buy and sell loans. Further, it has decided not to renew its warehouse agreements beyond October 2016.

The REIT cites continued unfavourable market conditions for the aggregation and securitisation of mortgage loans, as well as the implementation of a defensive strategy as drivers for these changes.

Five Oaks sponsored two RMBS in 2015 from its OAKS shelf and contributed collateral to at least one other bank-issued securitisation in 2014.

RMBS

Condominium price surge 'positive'

Moody's says that rising condominium prices is positive for Japanese RMBS as it will increase recovery rates on transactions backed by investment loans. The average price of studio type condominiums in the Tokyo metropolitan area has increased to the highest level since 1995.

These properties in the Japanese capital comprise between 60% to 70% of the collateral backing condominium loan RMBS in the country. Moody's notes there are no signs that the prices will decline, but higher prices do mean recoveries are greater in the event that the loans default and properties have to be sold to repay the loans.

Rising condominium prices also drive up the prepayment rates for the pool of loans backing condominium investment loan RMBS, which increases in turn the subordinate ratios of transactions with sequential waterfalls. Higher prices encourage owners to sell their properties and use the proceeds to pay off their loans, thereby driving up the repayment rate. The six month average annualised prepayment rate for the pool of loans backing the condominium investment loan RMBS increased significantly over the past two years to reach 5.7% in May 2016, the highest level since February 2006.

The annualised default rate, in comparison, has ranged between 0.2% and 0.6% since October 2012. Nonetheless, Moody's warns that the entry of new lenders into the market since 2010 could increase the risks for RMBS backed by condominium investment loans. This is because new lenders often focus on providing loans to existing borrowers seeking additional amounts to purchase more condominiums.

Such borrowers could prove overextended, especially if their condominiums become vacant and are therefore not generating rental income. By contrast, longer-standing lenders have tight lending criteria and typically do not grant excessive loans to borrowers with existing condominium investment loans.