Contents

RMBS

British steel

Rate cut troubles for UK RMBS overstated?

The Bank of England's decision to cut interest rates earlier this month was widely viewed as positive for the UK economy, but sparked concerns about the impact on UK RMBS issuance. However, the recent surge of alternative lenders could counteract any negative effects.

The Bank of England announced a stimulus package on 4 August to combat the potential shocks and uncertainties that could dampen the UK economy's performance following the Brexit vote. The package included a 25bp rate cut (with an indication that it could be cut further), a £10bn corporate bond purchase programme and the Term Funding Scheme (TFS).

The last of these measures is designed to offer funding to UK lenders in exchange for eligible collateral, providing a capacity of £100bn at a rate close to the base figure. This is designed as a cushion to support lenders in their efforts to pass on lower rates to their customers.

The response to the package has been largely positive by analysts, who view it as helpful for both the economy and credit markets. However, it has also invoked fears of a potential supply drain in UK RMBS, with lenders now gifted a cheaper alternative option for the foreseeable future.

"It brings back memories of the Funding for Lending Scheme (FLS) in 2012, when there was a dearth in issuance in the immediate aftermath," says Rob Ford, partner and portfolio manager at TwentyFour Asset Management. "On the one hand, it gives the banks cheap long-term financing to relaunch the system after the Brexit vote, but it's also creating a protection bubble of almost unlimited money."

However, Ford notes that the intentions of the two stimulus packages should be considered when looking at the potential long-term implications. The FLS scheme was used to help ease borrower constraints as the economy continued to recover, while the TFS is seen as a way to boost growth and alleviate the Brexit recession fears still haunting sentiment in the market.

"If Mark Carney wants to create growth, rates won't be able to stay this low forever," says Ford. "But it could be good for spreads if you are long of securitisation assets, and a growing economy in the long term will also be positive for markets. Understandably, the short-term worry is that it could prompt some banks to switch off the RMBS taps."

The issue is that the margin will be around 15bp cheaper for lenders, even if they work at the 25bp rate, as opposed to structuring a securitisation. "The markets often work themselves out and it would also be terribly naïve to think the key issuing banks will ignore their clients altogether," Ford observes. "They can't expect to stop abruptly and re-enter in three years, with the expectation that investors will come flocking back. It will more likely be a case of scaling back - not that market supply was exactly booming as it was."

He suggests that a likely scenario will see issuers - often known for producing multiple deals in a year - transition their securitisation programmes to a ticking-over scenario. This would perhaps involve issuing one deal a year, rather than multiple deals.

However, this would leave an opening for rising challenger banks and non-bank lenders to fill the gap. The emergence of such competitors has been a growing trend as banks hesitate to issue under tough capital restraints. For example, Kensington Mortgages was the largest securitiser of UK RMBS last year, placing four deals at a value of £2.8bn (SCI 26 February).

"It's easy to forget that the market has a number of diversified funding sources," says Ford. "There's no reason to say that non-bank lenders, such as Paragon, won't continue to utilise the space. I think challenger banks will continue to bring one or two annual deals to the market as well."

He continues: "And there's clearly still activity and speculation of activity going on in the market too, particularly with the Bradford & Bingley portfolio and where that will end up."

State-owned UKAR last week issued redemption notices for £2.9bn worth of Aire Valley Mortgages bonds, as part of a simplification process prior to winding down the group's securitisation programme (SCI 22 August).

A number of RMBS deals hit the market over the last month, despite the anticipation of a rate cut. These included Junglister's Hawksmoor Mortgages 2016-1, whose triple-A rated class A notes were sized at nearly £1.8bn and priced at three-month Libor plus 140bp (see SCI's new issue database). Clydesdale also made its mark with the £750m Lanark 2016-1, which received a positive response from investors.

"There was an order book of over £900m. The portfolio also has negligible losses and delinquencies, and huge credit enhancement," Ford concludes. "They did a solid job with it. I don't see why we won't continue to witness others utilise the space."

JA

ABS

FFELP SLABS 'info lacking'

Model risk remains high and collateral transparency remains limited in FFELP student loan ABS, say Wells Fargo structured product analysts. Inconsistency among the rating agencies leads the analysts to recommend investors wait for rating actions before anticipating relative value opportunities.

"Recent rating agency actions and commentary in the FFELP student loan ABS sector have left us somewhat puzzled," say the analysts. Some negative rating watches have led to downgrades, but other negative watches have been maintained based on anticipated sponsor action.

Such logic would not appear to fit with previous rating agency guidance, which suggested that they could not maintain triple-A ratings based on an option, rather than an obligation, of a non-investment grade sponsor to support a deal.

The first rating downgrades to non-investment grade bonds occurred last week, as Fitch downgraded the SLMA 2013-5 class A3 and class B notes. "It is difficult to differentiate why this deal was downgraded because the same rationale was given for other bonds where negative rating watches were maintained," note the Wells Fargo analysts.

Moody's has either affirmed or even actually upgraded a number of bonds that had been originally placed on review for downgrade in June (SCI 22 August). The rating agency's decision was based on having received updated information of voluntary prepayments and the weighted average age of the borrowers in the underlying collateral pools.

This raises questions as to precisely what information has been disclosed to the rating agency but is not available to the market. If such information is enough to change the rating agency's approach, it would presumably also affect investors' perspectives on the collateral.

Although some investors may choose to overlook rating volatility due to the significant government guarantee that the loans carry, the analysts believe spreads and bond prices will align with ratings to some extent. A lack of information on collateral performance makes assessing the underlying risks, and taking a position that the downgraded ratings do not appropriately reflect those risks, more difficult.

The Wells Fargo analysts have previously shown that legacy non-agency RMBS spreads can be a good proxy for potential spreads on downgraded, non-IG FFELP student loan ABS. Many non-agency RMBS carry low-IG or no-IG ratings, have sequential-pay structures, wide principal payment windows and are backed by uncertain cashflows, but are unlikely to take an ultimate principal loss. They are typically quoted at around 225bp.

"Considering that five-year senior FFELP bonds are currently quoted generically around 115bp, there seems to be meaningful potential downside to bondholders if significant downgrades occur. Based on the evidence so far, in our opinion, it seems difficult to determine which bonds are at greater risk of downgrade based on recent rating agency actions and commentary," say the analysts.

JL

ABS

Call variability observed

Most subprime auto ABS issuers have exercised clean-up calls in a relatively efficient manner, calling deals at the clean-up call threshold or within 1-3 months after, according to a recent Wells Fargo study. However, some variability among issuers has emerged since the ABS market normalised by end-2011 that may need to be accounted for when valuing bonds.

Wells Fargo structured product analysts examined the track record of a sample of subprime auto ABS issuers for the period 2000-2016. By 'efficient exercise', they mean that deals were called upon reaching the clean-up call threshold. The threshold is typically set at 10%, but can vary and be as low as 2%.

Deals not cleaned up efficiently were usually still outstanding 1-3 months after reaching the threshold. The study shows that the primary exception to efficient clean-up was during the financial crisis and its immediate aftermath. Liquidity was expensive and issuers delayed calling transactions to preserve financial flexibility in the face of wide spreads and lack of demand.

The analysts note that AmeriCredit provides one of the most in-depth views of subprime auto ABS call history. Based on deal vintages 2001-2012, 49 AMCAR transactions reached the 10% clean-up call threshold. Of these, 18 deals were called on time through 2008 and the clean-up call has been exercised promptly in all but 11 deals, which reached the call threshold from January 2009 to October 2011.

The average time deals were called past the 10% threshold during the financial crisis and its aftermath was 6.6 months. The longest time was 11 months for AMCAR 2004-DF, which reached its call date in January 2009.

"Because it was such a prolific issuer, AMCAR had a relatively large number of deals reach the clean-up call threshold in a short period of time during stressful financial conditions. This may have contributed to the longer timelines to resolve those deals," the analysts observe.

Beyond AMCAR and Santander Drive, clean-up call records become more limited and the results can be mixed. For example, the clean-up call history for Consumer Portfolio Services indicates an issuer willing to let deals amortise beyond the 10% pool factor threshold.

Prior to the financial crisis, the average time beyond the clean-up call threshold was 6.5 months and the average pool factor was 0.0577. But CPS' record during the financial crisis suggests the difficulty experienced by some of the smaller lenders in the ABS market, according to the analysts. The average time beyond the clean-up call threshold increased to 11.3 months and the average level of the pool factor dropped to 0.0344.

For the most recent deals that reached the clean-up call, its record has been more efficient. The average time outstanding beyond the threshold was 1.5 months and the last reported pool factor averaged 0.0932.

The analysts note that the subprime auto ABS market has grown significantly since 2010, with more lenders using securitisation and larger deal sizes emerging. Consequently, the clean-up call record of subprime auto ABS issuers is likely to be augmented over the next several years.

CS

Structured Finance

ECON amendments weighed

The European Parliament's ECON committee recently published 526 amendments to the proposed new European securitisation regulations. While the additional amendments include proposals for further tightening of the rules, there are also many amendments that could take the regulation in a more positive direction.

The latest suggested changes are in addition to the 153 amendments included in the two draft reports on the bills that were compiled by MEPs Paul Tang and Pablo Zalba Bidegain in June (SCI 9 June). These actions stand in stark contrast to those of the European Council, which adopted the text in December without making any material adjustments.

It is widely observed that the European Parliament has a critical stance towards the new securitisation proposals and a bias towards tighter rules appears to be emerging. To provide further insight into the stance of MEPs, Rabobank credit analysts attempted to quantify the latest amendments by classifying them into five categories - tightening (represented by a score of one), some tightening (two), neutral (three), some easing (four) and easing (five). They found that the simple average of the 526 amendments equals 2.96, indicating a neutral stance by MEPs.

Weighting the amendments by the number of seats in the Parliament results in an average score of 3.03. A similar exercise for Tang and Bidegain's draft reports results in average scores of 2.66 and 3.24 respectively.

However, some amendments have a bigger impact than others and it seems that the divergences between the political groups over more important topics are relatively large. "In general, it is clear that the Liberals, National Conservatives and Christian Democrats are arguing for some easing of the rules, while more left-wing parties are proposing further tightening of the rules," the Rabobank analysts observe. "Such splits are perhaps to be expected in the EP, but in our view combining these different views on specific securitisation bills into a consensus backed by a majority in the EP will be a considerable challenge."

The next ECON meeting on this topic is scheduled for 10 October, followed by the committee consensus vote on 9 November and a vote on 12 or 13 December in the Parliament's plenary session. "In our understanding, the latter vote is merely a formality - but, with the high number of amendments and the diverging views in some key areas, this timeline looks to be challenging, in our view. In other words, we would not be surprised if further delays occur here," the analysts note.

When Parliament has voted on the bills, they will form the basis of the trilogue negotiations with the European Commission and the European Council. "All in all, it is now almost certain that the debate on new securitisation regulations will be carried well into 2017. When enacted, the real work still has to take place - especially with regard to an easing of the Solvency 2 capital charges, which is in our view required to bring new life in the European securitisation market," the analysts conclude.

CS

Structured Finance

SCI Start the Week - 22 August

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

Pipeline
The outstanding deal pipeline has shrunk significantly over the past few weeks as the yearly August slowdown has come into effect. A marketplace lending ABS deal from loanDepot is understood to be in the works, but only one named deal - US$373.7m ECMC Group Student Loan Trust 2016-1 - joined the pipeline last week and stayed there until the close of business on Friday.

Pricings
The week's prints total was also modest. In total there were four ABS, two RMBS, a CDO and three CLOs.

US$1.1bn COMET 2016-A4, US$625m COMET 2016-A5, US$178.15m Foundation Finance Trust 2016-1 and US$1.5bn Honda Auto Receivables 2016-3 Owner Trust Notes accounted for the ABS. The RMBS were US$505m Mill City Mortgage Loan Trust 2016-1 and US$237.21m Nationstar HECM Loan Trust 2016-3.

US$333.75m Trups Financials Note Securitization 2016-1 was the CDO. The CLOs were US$354.1m Ballyrock CLO 2016-1, €323m Toro European CLO II and US$409m Trinitas CLO V.

Editor's picks
Retention span: The race to originate and structure US CMBS is reaching a critical stage, with the implementation of risk retention rules just over four months away. The recent issuance of the US$870.6m WFCM 2016-BNK1 kick-started a new era for the asset class, marking the first retention-compliant deal and precipitating a positive market reaction...

Deal news
• About US$3.64bn in loans securitised in CMBS issued since 2010 could be impaired by Macy's recently announced round of store closures, according to Morningstar Credit Ratings. The agency has identified 28 Macy's locations that reported below-average tenant sales and are the most at risk of closing.
• The final price for Commonwealth of Puerto Rico CDS was determined to be 58.5. Six dealers submitted initial markets, physical settlement requests and limit orders to the auction to settle trades across the market referencing the entity (SCI 19 July).

Regulatory update
• The Committee on Payments and Market Infrastructures (CPMI), IOSCO and the Financial Stability Board (FSB) have issued reports advancing the regulatory agenda on CCPs. The CPMI and IOSCO reports are aimed at enhancing the resilience of CCPs, while the FSB paper covers CCP resolution planning.
• The Committee on Payments and Market Infrastructures (CPMI) and IOSCO have published for public comment a second consultative report on harmonisation of the unique product identifier (UPI). The harmonised global UPI is intended to uniquely identify OTC derivatives products which authorities require to be reported to trade repositories.
• The US$4.5bn JPMorgan RMBS settlement was last week approved by the court, which overruled the final objector to the agreement. Proceeds could potentially be distributed within 12 months of the next remittance period.

Capital Relief Trades

Nordea completes synthetic deal

Nordea Bank has sold a synthetic securitisation referencing €8.4bn in SME and corporate loans. Investors have taken notes linked to the junior credit risk of the portfolio.

The synthetic structure means no assets will be derecognised from Nordea's balance sheet and Nordea will continue to service the loans. The risk-sharing structure does mean that the bank's CET1 ratio is enhanced, freeing up capital to engage in further lending.

"Only the first-loss tranche has been sold to investors, but this is sufficient to allow for significant risk transfer and therefore results in capital relief. Nordea's CET1 ratio will be enhanced, but the bank has not disclosed by how much," note Rabobank credit analysts.

The buyers of the notes are responsible for a pre-agreed amount of incurred credit losses of the reference portfolio. The size of this credit loss protection is sufficient to cover expected and unexpected losses, relieving Nordea from the associated risks.

Nordea will always retain a share of each of the underlying loans in the portfolio, which consists of €8.4bn in corporate and SME loans from over 3,000 borrowers across Sweden and Denmark. The loans are spread across a wide range of industries and asset classes.

"Nordea believes that by adding a simple and transparent synthetic securitisation to our risk and capital management toolbox, we are better able to serve our customers going forward," says Tom Johannessen, Nordea Bank head of group treasury and asset liability management.

Some regulators have expressed concern about using synthetic structures (SCI passim). Sweden's Financial Supervisory Authority, for instance, is currently reviewing how synthetic securitisations affect capital adequacy.

JL

RMBS

HLTV refinance programme planned

Fannie Mae and Freddie Mac are set to implement next year a new refinance offering aimed at borrowers with high loan-to-value (HLTV) ratios. The move is designed to provide liquidity for borrowers that are current on their mortgages, but are unable to refinance through traditional programmes because their LTV ratio exceeds the GSEs' maximum limits.

"Providing a sustainable refinance opportunity for high LTV borrowers who have demonstrated responsibility by remaining current on their mortgage makes financial sense both for borrowers and for the enterprises," comments FHFA director Melvin Watt. "This new offering will give borrowers the opportunity to refinance when rates are low, making their mortgages more affordable and thus reducing credit risk exposure for Fannie Mae and Freddie Mac."

To qualify for the new offering, borrowers must not have missed any mortgage payments in the previous six months, nor missed more than one payment in the previous 12 months. Additionally, they must have a source of income and benefit from the refinance, such as a reduction in their monthly mortgage payment.

The FHFA says the offering will "make use of the lessons learned from the Home Affordable Refinance Program (HARP) and its streamlined approach to refinancing". While the new high LTV streamlined refinance offering is more targeted than HARP, eligible borrowers are not subject to a minimum credit score, there is no maximum debt-to-income ratio or maximum LTV and an appraisal often will not be required.

However, unlike HARP, there are no eligibility cut-off dates connected with the new offering and borrowers will be able to use it more than once to refinance their mortgages. Borrowers with existing HARP loans are not eligible for the new offering unless they have refinanced out of HARP using one of the enterprises' traditional refinance products.

The new offering will be available to borrowers from October 2017. To ensure that high LTV borrowers that are eligible for HARP will not be without a refinance option while the new refinance offering is being implemented, the FHFA is creating a bridge to this future programme by extending HARP through 30 September 2017.

Wells Fargo structured product analysts suggest that the programme's preliminary underwriting criteria appear to be somewhat aggressive, although the current 95% LTV stipulation is likely to limit the borrower base for the offering. "Rather, the new HLTV programme appears to be geared to having an efficient refinancing construct in place, should there be another housing downturn," they observe.

They continue: "A widespread expansion of the program to lower LTVs cannot, however, be ruled out. That said, with the single security programme likely to be implemented in 2018, such an expansion may be delayed beyond that point."

Due to the delay in the expiration of HARP, the analysts note that an expected drop in HARP speeds is the limited implication of this latest FHFA announcement.

CS

Structured Finance

JPMorgan shakes up syndicate

JPMorgan has formed a new credit product development team, which will be headed by Ryan O'Grady and comprise members of the current credit markets team. Although currently co-head of the bank's global syndicate team, O'Grady's new role will require him to focus solely on the international syndicate business. He will report to his co-head counterpart, Bob LoBue.

In addition, following the integration of JPMorgan's securitised products syndicate business onto the global syndicate platform, the bank's public finance syndicate business will follow. Robert Servas will continue to lead this area, reporting to LoBue. David Lefkowitz is also adding to his recently announced role as global head of ABS origination by working with Kevin Corgan to lead the bank's primary CLO business globally.

Finally, JPMorgan has aligned its credit correlation business - headed by Fajr Bougettaya - under Sanjay Jhamna. Bougettaya will expand his responsibilities and lead JPMorgan's CLO and ABS trading in EMEA. He will report to Jhamna and Lefkowitz.

Structured Finance

CIFC's search ends

FAB Partners is set to acquire CIFC for approximately US$333m in cash. Under the terms of the merger agreement, CIFC shareholders will be entitled to receive US$11.46 in cash per share, representing a premium of more than 60% over CIFC's closing share price on 19 August and a premium of approximately 160% over the 27 January 2016 closing share price (the day prior to CIFC's announcement of its pursuit of strategic alternatives to accelerate the growth of its business (SCI 29 January)).

The CIFC board has declared a cash distribution of 10 cents per share to be paid on 12 September to shareholders of record as of the close of business on 31 August. Jeffrey Serota, CIFC chairman, comments: "We are pleased to have reached this agreement with FAB, which follows a thorough review of strategic and financial alternatives that generated interest from over a dozen suitors. Our board concluded that this offer maximises value for our shareholders and is in the best interests of our investors and clients."

With US$14bn in AUM, CIFC has over 75 employees and serves more than 200 in-stitutional investors globally. FAB is a global alternative investment platform that focuses on originating, structuring and actively managing investments across geographies and asset classes. The firm secured the capital backing for the acquisition of CIFC from Supreme Universal Holdings, a company controlled by Qatar's royal family.

Columbus Nova - CIFC's majority shareholder - has agreed to vote its shares in fa-vour of the transaction, which is subject to approval by CIFC's shareholders and the satisfaction of certain regulatory approvals. It is expected to close this calendar year.

JPMorgan is exclusive financial advisor to CIFC, while Dechert and Latham & Wat-kins are legal counsel. Moelis & Company is acting as exclusive financial advisor to FAB, and Weil, Gotshal & Manges and Ernst & Young are serving as legal advisor and accounting & tax advisor respectively.

Structured Finance

ABS syndicate head replaced

James Gray has been appointed head of ABS syndicate at Deutsche Bank. The promotion sees him move up from his role in the bank's ABS sales team, where he was covering, the UK, Netherlands and the Nordic countries. Gray replaces Bilal Husain, who moved to BNP Paribas last month (SCI 27 July).

Structured Finance

SF heads announced

US Bank has hired Joe Nardi to lead its global structured finance group, providing services that support its MBS and ABS operations. He will oversee a staff of approximately 200 employees throughout six locations across the US.

Nardi previously served as head of capital markets structured finance (CMSF) for Wilmington Trust. Prior to his work at Wilmington, he served as vp and head of the ABS business development group at Wells Fargo.

Wilmington responded by promoting Patrick Tadie to division manager of its CMSF group. The team provides agency and trustee services to the ABS, MBS, project finance, transportation leasing and insurance-backed related markets. Tadie will continue to be based in Wilmington's offices in New York City.

Structured Finance

THL taps marketing pro

THL Credit Advisors has recruited Katherine Taylor as a director in its New York office, where she will focus on business development, product development, strategic relationships and marketing across the firm's direct lending and tradable credit platforms. She joins from Graycliff Partners, the former private equity team of HSBC in the US and Latin America, where she was vp and head of fundraising and investor relations.

Structured Finance

Fund advisers pay SEC charge

A quartet of private equity fund advisors affiliated with Apollo Global Management have agreed to pay US$52.7m to settle US SEC charges that they misled fund investors about fees. Apollo has neither admitted nor denied supervisory failures, but has agreed to pay US$37.527m in disgorgement and interest.

The SEC says the four advisors failed to adequately disclose the benefits they received, to the detriment of fund investors, by accelerating the payment of future monitoring fees owed by the funds' portfolio companies upon the sale or IPO of those companies. These payments essentially reduced the companies' value prior to their sale or IPO and reduced amounts available for distribution to fund investors.

The SEC also says one of the advisors failed to disclose certain information about interest payments made on a loan between his affiliated general partner and five funds. The loan was to defer taxes on carried interest due the general partner and subsequent disclosures in financial statements were misleading.

Structured Finance

Mid-market pro recruited

Sterling National Bank has hired Mark Smith as md, responsible for expanding the bank's presence with middle market companies in New Jersey. Along with mid-markets, he will focus on corporate banking and capital markets.

Prior to joining the firm, he was evp and head of capital markets at Capital One Bank, where he was responsible for establishing and leading the capital markets business within the commercial banking division. He has also worked in the commercial banking division of Wachovia Bank, where he led a team of mid-market specialists across the mid-Atlantic region.

Structured Finance

Resource America merger approved

Resource America stockholders have approved the merger of the firm with a subsidiary of C-III Capital Partners (SCI 31 May). Approximately 80% of the shares of Resource America common stock that were outstanding as of the record date of 13 June approved the merger and approximately 99.8% of the shares of Resource America common stock that were voted approved the merger. The merger is expected to close on 8 September.

Meanwhile, Moody's notes that a change of control in Trapeza Capital Management - which was established as a joint venture between Financial Stocks and Resource America - has occurred in relation to Trapeza CDO VI, VII, IX, XI, XII and XIII, as well as Trapeza CDO Edge. The collateral management agreements for the Trups CDOs have been re-assigned, but the responsibilities, duties and obligations of Trapeza as collateral manager will not be altered. Moreover, no changes are currently planned to the principal personnel at Trapeza responsible for collateral management of the deals.

Moody's confirms that the assignments will not negatively impact any of its current ratings on any class or sub-class of notes issued by the CDOs.

CDS

Trading co-head hired

Gramercy Funds Management has brought in Chris Tackney as md and co-head of its trading desk, along with Matt Maloney. In this new role, they will both manage a trading desk that encompasses CDS, performing and distressed corporates, sovereigns, equities and currency hedges.

Further, Tackney is responsible for building and maintaining effective relationships in order to facilitate firm-wide trade execution, asset sourcing and new issue allocations. He will also serve as a member of the investment committee.

Prior to joining Gramercy, Tackney was md, head of trading at Greylock Capital. Before that, he was senior portfolio manager for emerging market corporate bonds at Schroder Investment Management. His other senior roles have been at Credit Suisse, Black River Asset Management, BlackRock and TIAA-CREF.

Insurance-linked securities

Willis ceo announced

Willis Re has appointed Chris McDowell as ceo of Willis Re Bermuda. On 1 January 2017, he will officially succeed Michael Harden, who is being made president of Willis Re Asia Pacific.

McDowell joins from Aon Benfield, where he was ceo of global re-specialty in Bermuda. He will now report with his team to Willis Re Specialty.

Harden was former chairman of Willis Re Australia prior to Bermuda and has experience in property and casualty reinsurance, as well as specialty accounts across the globe.

Risk Management

BRAIS acquisition closed

Bloomberg has completed its acquisition of Barclays Risk Analytics and Index Solutions (BRAIS) from Barclays (SCI 17 December 2015). The transaction includes the widely-used Barclays fixed income benchmark indices, BRAIS strategy indices and the intellectual property of the POINT portfolio analytics solution.

The benchmark indices will be co-branded 'Bloomberg Barclays Indices' for an initial period of five years. Bloomberg will also act as the calculation agent for the Barclays quantitative investment strategy index business and Barclays strategy indices.

The acquisition enables Bloomberg to incorporate sophisticated models and analytics from POINT into Bloomberg PORT and augment these with data, news, alerts, mobile capabilities and Bloomberg's order management solutions to enhance the investment process and facilitate collaboration. Barclays has agreed to continue to operate POINT for 18 months post-completion to help clients transition.

Risk Management

Valuation pro recruited

Brian Sciacca has been appointed global head of valuation policy, reporting and analytics at Citi. In his new role, Sciacca will focus on improving Citi's system infrastructure and valuation control environment. He reports to Grant Rusk, North American head of valuation control and analytics.

Sciacca was previously RBS' head of valuation control, Americas, where he redesigned the operating model and control infrastructure at the bank. Before that, he was global head of credit valuations at Lehman Brothers and managed valuation controls for Dillon Read Capital Management. He has over 20 years of valuation-specific experience.

ABS

FFELP notes upgraded

Moody's has upgraded 14 classes of notes and affirmed eight additional tranches across 19 FFELP student loan ABS transactions sponsored by Nelnet after the agency reduced its expected loss projections. The actions come after Moody's originally placed a batch of the notes on review for downgrade in June, in line with its new rating approach for the asset class.

The reduced loss expectations follow a review of updated information received by Moody's on voluntary prepayments and the weighted-average age of borrowers in the underlying collateral pools. The notes that received rating confirmation were in: Nelnet Student Loan Trust 2009-2, 2009-3, 2010-1 and 2010-2. The others were the class A notes in Nelnet Student Loan Trust 2013-3 and 2014-5, and the class As and Bs in 2015-2. All the ratings were triple-A, with the exception of the class Bs, which saw their Aa1 rating affirmed.

The upgrades were to triple-A rating status and affected class B notes from Nelnet Student Loan Trust 2012-1, 2012-2, 2012-4, 2012-6, 2013-1, 2013-3, 2013-4, 2013-5, 2014-1, 2014-3, 2014-5, 2014-6, 2015-1 and 2015-3.

ABS

Zero floor inserted

Santander has amended the transaction documents for Bilkreditt 6, its 2014 Norwegian auto loan ABS, to ensure that the interest payable to noteholders is subject to a zero floor. The firm says that as a result of negative Euribor rates, there is a risk that the interest rate on the notes could fall below zero. It adds, however, that the amount of interest that the issuer is obliged to pay to noteholders cannot be a negative amount and no noteholder can be compelled to pay any amount to the issuer.

ABS

Auto ABS methodology finalised

Scope has published its final auto ABS rating methodology, confirming that it is largely unchanged from the proposals the agency set out last month. The approach relies on transaction-specific input assumptions to allow for larger rating and transaction differentiation, even when transactions have the same originator or are based in the same country.

The agency adds that it applies a highly granular approach, using the historical performance references of defaults and recoveries in the form of vintage data sets. The analysis of simple and transparent auto ABS is also straightforward, involving the modelling of portfolio losses and cashflow distributions.

Further, the methodology promotes stable protection buffers through the cycle for triple-A ratings. Scope focuses on a long-term view, complemented by market performance references for the specific country, to reduce the distortions of the protection levels resulting from volatility of default rates over an economic cycle.

Scope says that the ratings assigned to auto ABS reflect the expected loss for the investor on a securitisation note in the context of the expected weighted average life of the investment. The expected loss accounts for the time value of money at the rate promised by the instrument to the investor.

Structured Finance

ABCP issuance under threat

S&P says that ABCP volumes could begin to feel the squeeze as a result of impending regulatory reforms. Issuance slowed in 2Q16 after what the agency describes as transitory circumstances led to a brief growth spurt from historical lows.

Higher financing rates for auto-related issuers earlier in the year led to a temporary spike in demand for ABCP. However, volumes dropped by over 5% in 2Q16. In addition, S&P says that ABCP conduits could lose an additional portion of investors over the coming months if prime institutional money market funds (MMFs) continue to close shop or convert into government funds in response to regulatory reforms.

These entities traditionally hold a substantial amount - roughly one-third - of outstanding ABCP, making them a key player in conduits' placement strategy. However, the impending reforms appear to be accelerating conversions and wind-downs of MMFs.

The reforms will introduce structural and operational changes, in order to address the risk of shareholder runs, by requiring floating-rate net asset values, liquidity fees and redemption gates for these funds. As a result, the assets within MMFs are expected to substantially decline over the course of the year and could leave ABCP issuance at near all-time lows.

S&P adds that ABCP issuance could possibly rebound from this demand shock if investors are compensated with rising spreads, or if demand from another investor group replaces that of prime institutional MMFs. "Fundamentally, investors will demand a higher premium on these funds for the additional costs related to these regulatory reforms; to a certain extent, this is already occurring," the agency explains.

Spreads between institutional and government funds have already risen by as much as 16bp recently. But a rise in yields is limited by the current interest rate environment and could place a cap on the amount MMFs are willing to offer.

S&P says that because the invested assets of these funds are constrained by movements in short-term interest rates, there's an upper bound in the level of yield MMFs can give investors while remaining profitable in the current rate environment. As such, any upward reversion in ABCP issuance due to rising MMF spreads is restrained by these conditions.

In contrast, private liquidity funds may serve as an effective means of absorbing a decline in demand for issuance as they are not required to maintain compliance with the regulatory reforms. Their exemption means that they could attract short-term investors by maintaining a fixed net asset value calculation method.

As of late 2015, nearly 85% of these funds did not maintain floating-rate net asset values, according to the US SEC. If institutional investors familiarise themselves with these new structures, S&P says that private funds could replace part of the lost demand in time.

CDO

Junior Trups to be redeemed?

Institutional Financial Markets subsidiary Star Asia Finance has entered into a supplemental indenture with Bank of New York Mellon in connection with the Taberna Preferred Funding II, III, IV and V Trups CDOs. The indenture permits the Delaware company, at its option, to redeem junior subordinated securities issued by it and held by the deals in whole on or after 15 June but no later than 31 August 2016.

The redemption price is equal to 80% of the principal amount, together with accrued and unpaid interest through but excluding the date fixed as the redemption date. Moody's has determined that the move will not cause its current ratings on any class of affected notes to be reduced or withdrawn.

CDS

Isolux Corsan CDS settled

The final price of Grupo Isolux Corsan Finance CDS has been settled at 15.75. At yesterday's auction, 10 dealers submitted initial markets, physical settlement requests and limit orders to settle trades across the market referencing the entity (SCI 8 August).

CLOs

CLO resets to rise?

US CLO refinancing and reset activity is expected to rise in 4Q16, as investors and collateral managers seek to extend existing deals prior to the 23 December risk-retention deadline. Over US$250bn of CLOs - representing 72% of the outstanding post-crisis market - will have exited their non-call periods during the quarter and be eligible for refinancing, according to Wells Fargo figures.

Roughly 12% of eligible CLOs have been refinanced or reset since 4Q12. However, a recent Wells Fargo study shows that 100 CLOs totalling US$53bn will have their first chance to refinance in Q4 and over 75% of them are from the 2014 or 2013 vintage. October is set to see the largest volume of deals exiting call protection, at US$37.4bn.

Refinancing typically occurs when a CLO reaches one year before end of reinvestment (EOR). Of the CLOs eligible for refinancing in 4Q16, 40% of them exit reinvestment within a year and more than half exit reinvestment within 18 months.

Wells Fargo structured product strategists suggest that the focus on amending or refinancing existing CLOs may subtract from net new issuance, however. "We believe CLO resets are a cost-efficient method for CLO managers to maintain AUM volume amid low loan issuance and a crowded year-end CLO primary calendar," they observe. "CLO investors can view resets as a substitute for new issue, especially if investors do not have capital to deploy; investors also benefit from CLO resets by avoiding ramp risk. For equity investors, we believe CLO resets are an attractive way to maintain high CLO equity distributions, avoid lower distributions as deals amortise and allow managers to manage through a credit cycle downturn, rather than deals going static as defaults rise."

CMBS

Negative rate warning for CMBS

Moody's says that negative interest rates could be damaging for all European CMBS, but particularly for legacy and pre-2015 vintages. The agency explains that CMBS 1.0 and 2.0 transactions issued before 2015 have fewer protections against the excess spread erosion that results from negative rates.

"CMBS 1.0 and pre-2015 CMBS 2.0 deals do not have contractual interest rate floors. Instead, they allow the issuer to unilaterally floor note all-in rates at 0%, while loan interest receipts continue to fall with negative Euribor rates," says Tobias Venzke, an avp and analyst at Moody's. "This dynamic erodes excess spread and increases the risk of interest shortfalls on the notes, namely junior notes."

Euro-denominated CMBS notes typically pay floating rates benchmarked to Euribor, which is currently negative. In a negative rate environment, if CMBS notes have interest rate floors and the loans do not, loan interest receipts by the issuer would decline while its liabilities would not change to the same extent, thus eroding excess spread. In contrast, for CMBS 2.0 notes issued and loans originated in 2015 and 2016, both have contractual Euribor floors of 0%, largely eliminating the direct risks to the transactions of negative interest rates.

Moody's also outlines various other factors that could add to the risks for 1.0 and pre-2015 notes. Some of the transactions feature loan level interest rate swaps, for example. If the benchmark rate is negative and the swap documentation does not use a zero-rate method, the borrower owes the swap counterparty the negative floating leg. Moody's says this would decrease the amount of cash on hand to make debt service payments on the loans, thus increasing their probability of default.

CMBS

Mall CMBS performance varies

The ability of shopping malls to retain tenants varies widely, with the recent wave of department store closures (SCI passim) and growth of online shopping exacerbating the gap between successful and unsuccessful centres. Moody's notes that these factors in turn affect the performance of loans backed by malls within CMBS transactions.

As most mall loans within CMBS are structured with 10-year terms and a balloon balance that comes due at maturity, Moody's assesses collateral by analysing how well-positioned a mall is to survive over the next 10 to 20 years. The perspective of the lender is also taken into account, as they may refinance the loan for a further 10 years.

When weak malls fail, the rating agency notes that the losses can be considerably higher than for other CMBS asset classes. This is because in many cases it is the mall's business model that has failed. Therefore, it is important to differentiate between strong and weak malls within their region, taking into account location, tenants and design.

Moody's adds that not all malls in CMBS deals are suited to traditional income-based valuations due to concerns about their income over the long term. In these cases, the agency may apply recovery-based analysis, which takes into account the amount of value the CMBS trust could recover from the sale of collateral in the event that a mall closes down, essentially 'pre-defaulting' the loan.

Since 2008, more than 30 regional malls in the US have been liquidated within the CMBS universe, with an average loss severity of over 75%. Losses exceeded 100% in 10 cases. By way of comparison, the average loss for all CMBS loan liquidations during the same timeframe averaged 45%.

CMBS

'Quick' pay-offs reviewed

The large volume of maturing US CMBS loans in 2016 and 2017 has sparked concern about the transfer of loans to special servicing at or near maturity, only for these loans to quickly pay off. Fitch reviewed 2016 special servicing transfers through mid-July and observed that approximately 20% of loans transferred for maturity-related default paid off within 120 days, with the majority paying off within the first 30 days. However, the agency notes that the limited number of instances of quick loan pay-offs - 54 out of 271 loans - makes it difficult to draw any meaningful conclusions regarding special servicing behaviour.

Fitch says that 533 loans have transferred to special servicing in 2016, with an original principal balance (OPB) of US$10bn and an average OPB of approximately US$19m. Of these 533 loans, 271 with an OPB of US$4.7bn and an average OPB of US$17m were transferred to the special servicer due to imminent maturity default or maturity default, representing approximately 51% of loan transfers by loan count. In terms of timing, maturity-related transfers increased in 2Q16 to US$1.9bn (151 loans) from US$1.4bn (111) loans in the prior quarter.

The agency notes that 54 of the loans transferred for loan maturity default subsequently paid off by the July distribution date, with an OPB of US$822m. This population represents 20% by loan count of the maturity-related transfers from 2016 and only 10% of the total number of loan transfers in 2016, as of 1 July.

The largest number of these resolutions that quickly paid off (accounting for 23 loans) took place within 30 days of transfer to special servicer. While 43% of paid-off maturities occurred within 30 days of transfer, the 23 loans that paid off within 30 days represent only 8.5% of the 271 loans that were transferred due to imminent maturity default or maturity default.

RMBS

Liquidity warning issued

KBRA is calling for regulators and policymakers to take notice of dwindling liquidity and capital to support the markets for mortgage servicing rights, MBS and government securities. In a new report entitled 'Low rates, low growth and falling market liquidity', the agency highlights a lack of business volumes driven by low or even negative interest rates and excessive regulation.

"We believe that the combination of restrictive regulations on credit creation, unnecessary increases in capital and liquidity requirements for banks and the deflationary effect of low interest rates are potentially producing the circumstances for a serious liquidity crisis," KBRA notes. The agency says that policymakers should consider what this reflects about the economic model for lending, loan servicing and securities dealing in the current regulatory environment.

Without relief in terms of higher interest rates and meaningful regulatory reform, smaller non-bank seller/servicers operating in the US mortgage market could fail, according to KBRA. "If that occurs, advocates of increased regulation may be surprised to discover that the creditors of these entities may simply abandon unprofitable mortgage servicing portfolios," the agency observes.

RMBS

Non-QM RMBS closed

Angel Oak Capital Advisors has completed its second RMBS backed primarily by non-qualified mortgages. The US$132.65m AOMT 2016-1 transaction securitises loans originated by three affiliated lenders - Angel Oak Mortgage Solutions, Angel Oak Home Loans and Angel Oak Prime Bridge.

The deal comprises US$119.38m of senior notes and US$13.26m of subordinate notes. Angel Oak Capital (through one of its accounts) has retained 5% of the offered securities to satisfy Dodd-Frank risk-retention requirements and 100% of the remaining classes of subordinate securities. The loans adhere to the ability-to-repay regulation and require significant down payment.

"Angel Oak's mortgage lenders have seen a steady increase in non-QM mortgage origination volume since the inception of these programmes," comments Angel Oak ceo and cio Sreeni Prabhu. "Our lending platforms are on pace to originate approximately 3,100 loans totaling approximately US$800m by year-end. Angel Oak Capital will continue to selectively purchase the loans we feel fit best within securitisation parameters and meet investor requirements."

RMBS

Aire Valley redemptions due

UKAR last week issued refinancing notices for Aire Valley Mortgages series 2004-1, 2005-1, 2006-1 and 2007-1, representing £2.9bn of Bradford & Bingley RMBS. In a move that is expected to simplify the sale of the buy-to-let mortgage portfolio (SCI 7 June), the bonds will be redeemed on 20 September.

A further £2.5bn of retained Bradford & Bingley bonds are set to be redeemed shortly, as part of the wind-down of the group's securitisation programme. The lender is expected to use its balance sheet to fund the refinancings.

Such redemptions contrast with the approach taken with the Northern Rock portfolio, in which the RMBS notes were called after the sale of the book to Cerberus (SCI passim).