Contents

ABS

Picking up PACE

Ygrene seeking to make its mark in ABS

Ygrene Energy Fund is planning a securitisation before year-end that will offer a unique pool of PACE assets. At the same time, the company has begun building out a team of new recruits to facilitate its long-term securitisation plans.

Ygrene's chief financial officer, Michael Chan, says that the company is planning to tap the securitisation market some time in 4Q16, following the issuance of its debut ABS last year (SCI 24 July 2015). The company announced earlier this year that it had secured a US$250m warehouse credit facility, with the assistance of three large bank partners, to fund its clean energy projects. At the time, it was noted that Ygrene would securitise the assets once they reached a pool size in the range of US$150m to US$250m.

Now the firm has signalled its intent to develop and enhance a mandate for securitisation, with the announcement last week of a trio of new hires. Rasool Alizadeh has been appointed director of capital markets and ABS, focusing on Ygrene's funding and liquidity needs. He joins from SMBC Nikko Securities America, where he was the senior banker responsible for its term ABS new issue initiative.

"When you are opening up a new line of financing, additional firepower is always needed," says Chan. "Alizadeh's experience with ratings agencies and ABS issuance will be particularly useful as we head towards achieving this public deal."

The other recruits are Giancarlo Gennaro as senior director of finance and Ilan Gleiser as chief risk officer. Gennaro came from Cronos Group, where he was responsible for its global cash management function, maintaining working relationships with banks and investors and managing liquidity through the origination and structuring of ABS term notes. Gleiser arrived from Plural Bank, where he was responsible for managing the market and tail risk of US$5bn across 20 multi-asset class funds.

"Gennaro will be essential for his experience in providing reporting transparency and collaborating with capital providers, while Ilan adds another piece to the puzzle by formalising our goal in maintaining a high product standard as we diversify," Chan explains. "The three together are meant to signify the company's intent in executing its long-term strategic plan."

This plan features the company's financing warehouse as its core short-term funding vehicle, with securitisation intended as a broader, programmatic long-term funding mechanism. In part, this approach is due to the current rise of capital markets as a more attractive means of financing assets in PACE, says Chan.

"We've been chatting with investors for a long time and attending the IMN conferences in Vegas and Miami. The reception has been very strong," he says. "They trust the Ygrene name and are also attracted to the fact that our product offers a very diversified solution."

Ygrene is using this service as a unique selling point, being the largest competitor in PACE to offer projects on both the residential and commercial front. With plans to expand the company's geographic mandate in the US too, investors looking for greater diversity in the asset class are receptive to the company's message.

"Our transactions will include a mixture of PACE on commercial and residential properties. On top of that, we have a multi-state plan to branch out from our established presence in California and Florida," explains Chan.

He continues: "We are also looking at Georgia, Arkansas and Missouri. Investors find it appealing when you show a willingness to broaden your mandate in multiple ways."

Ygrene is bolstering its platform at a time when PACE is an emerging and increasingly appealing asset class for the US securitisation market. Near the start of the year, certified green bonds in the PACE ABS market hit the landmark US$1bn issuance figure (SCI 15 February). This was then followed up with the largest deal to date earlier this summer (SCI 7 June).

However, the sector still faces a number of challenges often associated with growing asset classes. For example, despite the results of PACE deals so far showing collateral to be secure, the lack of historical data could be a barrier towards eventually achieving triple-A rating status for future deals.

But for Chan, PACE's emergence means that continuing to educate new investors on the product is currently the most pressing need. "PACE actually has a large investor base, but it's a mixture of those aware of the ins and outs and those who are intrigued but want to know more about it first," he says. "It's a work in progress, but a significant opportunity."

JA

CLOs

Triple crown

Rising rates spur CLO resets, equity squeeze

Rising interest rates are having a three-pronged effect on the US CLO market. Not only are step-up coupons increasingly being refinanced, but CLO debt holders are also benefitting from wider spreads, while CLO equity holders are being squeezed by Libor floors.

CLO 2.0s structured with triple-A note interest rates that step up over time account for ten of the 13 deals that have - or are in the process of being - refinanced this year, according to Moody's August CLO Interest publication. Of these transactions, six are from the 2013 vintage and four from the 2014 vintage.

Rising interest rates is the main driver behind the recent slew of CLO resets, confirms Matthew Natcharian, head of structured credit at Babson Capital Management. "When these deals were originally issued in 2012-2013, there was significant demand for CLOs with short lives in order to achieve tight coupons, given the wide spreads at that time. But the expectation was that the deals would be refinanced eventually and, because the new issue market has been relatively slow recently, dealers have had the capacity to work on resets," he explains.

Natcharian says that the current CLO restructuring activity has two broad motivations: refinancing deals to avoid step-ups, keep the arbitrage flowing to equity holders and maintain the short WAL; or resetting deals to extend the reinvestment period. The latter transactions may be able to buy more collateral at the margin, due to the longer reinvestment period, but will mainly retain their original portfolios.

"Most investors are happy to remain invested in the deals: CLO spreads are wide relative to other asset classes. Dealers may try to sell resets to new investors, but usually the current holders remain in place," he adds.

JPMorgan CLO analysts note that although refinancings of non-risk retention-compliant CLOs priced before 24 December 2014 are allowable after the risk retention compliance period, the carve-out limits the flexibility of refinancings. And because resets would be prohibited for non-risk retention-compliant CLOs after the risk retention compliance date, they expect more of these restructurings to hit the market in the coming months.

Moody's reports that on average the triple-A spreads for CLOs refinanced in 2016 are 43bp below those that would have resulted from the step-ups, with the savings ranging from 22bp to 61bp. Although most of the deals refinanced around the time of the initial step-up, five refinanced around the time of the second step-up. Given the outstanding principal balances of the tranches and reductions against the spreads that would otherwise have applied, the average savings for the deals that have refinanced this year is about US$683,000 in annual liability costs.

The agency adds that a further 13 2013-2015 vintage CLOs face a material risk of interest margin erosion because of note coupons that either have already stepped up (in the case of notes with a current outstanding principal balance of US$627m from six deals) or will step up (US$647m from seven deals) in 2016-2017.

While a flurry of resets is anticipated in Q4 (SCI 22 August), the volume is unlikely to impact new issuance, as the pipeline is relatively slow - albeit it is expected to pick up after the Labor Day holiday. However, reset activity could make it tougher for smaller managers to enter the pipeline, especially since dealers find it easier to sell refinancings than new issues.

Three-month Libor has increased by roughly 20bp over the past two months, creating a squeeze on CLO equity distributions, as the rate moves closer to the Libor floors embedded in loans. Of the loans in the JPMorgan loan index, 96% currently have a Libor floor struck at roughly 100bp. Based on the firm's short-term interest rate forecast, three-month Libor is projected to hit 95bp by end-September and CLO equity holders should begin missing out on the Libor floor benefit by year-end.

"From an equity perspective, the cost of debt is increasing but the interest income remains the same. But the market expected Libor to rise eventually and equity holders will have priced it in," Natcharian observes.

He continues: "This issue is unlikely to harm the CLO market in the long run. If Libor continues to rise, once it is higher than the floors, the squeeze will disappear."

Against this backdrop, CLO debt is a sweet spot, offering wide spreads and competitive yields at the triple-A, double-A and single-A level compared to other asset classes. Natcharian favours triple-A and triple-B/double-B paper, in particular, in terms of relative value.

"Senior and subordinated tranches have seen less tightening than across the rest of the capital structure and continue to provide an attractive pick-up relative to the underlying loans," he notes.

He concludes: "August has been very busy and less volatile compared to previous summers, and deals have been well-subscribed. We've seen strong returns over the last two months, which sets the market up for robust new issuance for the rest of the year. CLO relative value continues to improve versus other asset classes and is attracting new entrants to the sector."

CS

Marketplace Lending

Secondary education

Liquidity, accurate valuations could stabilise sector

The first half of 2016 brought several challenges for the marketplace lending industry in the US, with the Q2 results of many platforms confirming falling origination volumes and revenues, largely due to a pullback from investors. While this may raise wider concerns about the viability of the sector, some participants believe that the reason for the downturn is not a complex one.

Hyung Kim, founder and ceo of Ldger, states: "I think it highlights the fickle nature of investors and it is unfair, in that the underlying assets - the loans originated - are of the same quality, as ever. It shows that the drop-off is sentiment-driven more than anything."

A wider issue, Kim suggests, is that the industry still lacks the kind of liquidity that it needs in order to thrive. He says: "The issue of lack of liquidity is potentially a barrier to the industry and is something that Ldger could help address by stimulating the growth of the securitisation industry and, with it, the secondary market - initially with whole loans."

The industry could benefit from both a greater number of participants engaged in securitisation and it could directly help platforms struggling to maintain steady flows of capital, particularly during times when credit is less easily available - such as in a downturn. Kim believes that this lack of steady funding has caused these issues now being experienced by platforms and that securitisation is "a much better and more stable source of capital for a platform and could address several problems they're now facing".

The first sizeable securitisation of Lending Club loans was recently closed and the lender is also hiring more individuals with structured finance knowledge and institutional investor expertise. "When you have credit cycles that change the availability of capital, one model isn't going to be effective - flexibility is very important for platforms' longevity. These changes in the availability of capital and the fickleness of investors isn't anything new, so it's a little surprising that platforms have been slow to recognise this," Kim observes.

The question about why the securitisation market - and, with it, the secondary market - has perhaps not been as buoyant as it could be may be due to a range of factors, including expense. However, the complexity of documentation required for ABS can also slow the process.

Kim suggests that this is an area that could be streamlined and is something Ldger in particular may have a solution for. "Marketplace lending ABS should be more open to 'templatisation'. It's not the sort of asset class that needs lots of different types of documentation."

He continues: "We hope to streamline this and assist in making the process more efficient - a tech add-on or Software as a Service (SaaS). By doing this, we can help boost the standardisation of marketplace lending ABS and potentially other asset classes, to assist firms involved in structuring deals starting from scratch every time."

More regular issuance from a larger number of platforms in the sector could also feed into a more liquid secondary market, both of whole loans and securitised bonds. "An issue at the moment in terms of secondary market liquidity is that there is a concentration of participants holding the loans until maturity," Kim explains. "This is again surprising, given recent concerns about the stability of the sector. You would normally expect investors to be keen to sell in such an environment."

Ldger, for one, aims to address the lack of liquidity by developing a universal pricing method for marketplace loans and then creating an index. Enabling participants to value marketplace loans accurately is crucial to the growth of a secondary market, Kim concludes.

RB

Secondary markets

Euro secondary stable

The European securitisation secondary market remained stable throughout August and that looks unlikely to change in the run up to the US holiday on Monday.

For the most part 2016 followed a traditional pattern in August across ABS/MBS - liquidity was thin and activity was patchy, with BWICs few and far between. UK non-conforming/buy-to-let paper saw the most demand, which edged spreads in slightly over the month; there were also pockets of activity at times surrounding prime bonds. Overall, though, generic secondary spreads remain flat to slightly tighter since the beginning of the month.

CLOs saw a bit more price action bolstered by the continuing US CLO rally and strong activity there. While European CLOs were considerably quieter than in July strong execution of a handful of BWICs last week evidenced the continuing tightening bias in the sector. Spreads at the top of the stack have moved little since 1 August, but mezz paper has continued to tighten - 2.0 triple-Bs, for example, are now around 20 points tighter than 1 August and trading with a H300s-VH300sDM.

There are currently three BWICs on the European calendar for today. First, there is a €4m single line of BLUME 2016-1X E due at 14:00 London time. The double-B CLO has not covered on PriceABS before.

At 14:30 there is a three line RMBS mix comprising €10m CAJAM 2006-2 A2, £3m ERF 3 B and €5m PARGN 14X CB. None of the bonds has covered on PriceABS in the past three months.

At 15:00 there are 12 lines of European CLOs from across the stack totalling €44.573m - ALPST 1 D, ALPST 2X C, AVOCA IV-X D, CADOG 1 D, CELF 2005-2X C, EUROC VI-X D, HARBM PR3X A2, HARVT 8X C, HARVT III-X C1, HEC 2007-3X D, JUBIL VIII-X D and JUBIL V-X C. Two of the bonds have covered with a price on PriceABS in the past three months - EUROC VI-X D at MH96H on 13 July and HEC 2007-3X D at VH80S on 11 July.

Secondary markets

US CLOs power on

The US CLO secondary market powered on through August while most other securitisation sectors experienced something of a summer lull.

The patterns of activity seen at the start of the month continued through to its close with the CLO rally keeping its momentum amid fairly stable broader markets and sellers still able to find buyers despite high secondary supply volumes. Indeed, August represented the busiest month of the year so far in CLO BWIC terms, though volumes have begun to fall away considerably this week in anticipation of Monday's Labor Day holiday.

Throughout the month strong demand was seen across the capital structure and vintages. Mezz paper remained the most active and highest performing sector.

However, aside from 1.0 seniors and 1.0 and 2.0 equity that were broadly unchanged, all parts of the stack saw some month-on-month tightening. The biggest move came in 2.0 single-Bs, which have tightened by more than 120bps, with the strongest names now trading below 1,000 DM.

There are currently two BWICs on today's US CLO calendar. At 10:00 New York time there are two line items totalling $4.8m - HLA 2014-1X C and ROCKW 2007-1A A2L. Neither bond has covered on PriceABS in the past three months.

Then, at 13:00 there is a three line $27m list comprising: DRSLF 2014-33A B, OCP 2013-3A B and OZLMF 2013-3A A1. Only DRSLF 2014-33A B has covered on PriceABS in the past three months - at 100.2 on 25 August.

CLOs

Mid-market CLO breaks new ground

Churchill Asset Management returned to the US CLO market last week with a deal of several 'firsts'. It is Churchill's first 2.0 deal and first deal since the old Churchill Financial team was brought into TIAA-CREF, it is the first middle-market CLO to include a single-B tranche and it is the first distributed CLO to be jointly rated by Moody's and DBRS.

TIAA Churchill Middle Market CLO 2016-1 is a US$382m CLO managed by TIAA-CREF Alternative Advisors, with Wells Fargo serving as co-manager. The class A notes, rated by both Moody's and DRBS, are sized at US$212m and priced at three-month Libor plus 215bp.

The US$36m class B notes priced at 301bp, the US$30.75m class Cs priced at 401bp, the US$24m class Ds priced at 600bp, the US$16m class Es priced at 950bp and the US$23m class Fs priced at 1200bp. While DBRS has not historically been active in rating deals such as this, the rating agency does intend to become more involved in the sector.

"This is a very deliberate step for us. We have worked for a while in our own particular niche in the middle-market space, rating more bespoke tranches," says Jerry van Koolbergen, head of US and European structured credit, DBRS.

He continues: "We have tended to rate things that are off the radar a little bit, often looking at warehouses and the like. Our rating the TIAA Churchill deal is the result of the reputation we have built rating bespoke structures and you can certainly expect to see our ratings on more middle-market CLOs in the future."

JL

CLOs

August boost as CLO activity drops

Secondary CLO activity in 2016 so far is down on 2015 in both TRACE reported volume and BWICs. However, the traditional summer slowdown trend has been bucked, with JPMorgan CLO analysts noting significant activity in August.

Along with January and November, August has consistently been a quiet month for secondary trading since 2012. In fact, since 2013 it has been the absolute lightest month for BWIC activity. However, this year August has the highest monthly volume of 2016 for US CLO trading.

US CLO BWIC volumes for 1H16 total US$13.38bn, down from US$20.2bn in 1H15. Year-to-date volume of US$18.77bn has been boosted by US$3.6bn in BWICs during August, helping to close the gap on the 2015 YTD figure, which it remains 24% down on.

European BWIC volumes in 1H16 and YTD total €2.21bn and €2.68bn respectively. European BWIC volumes are down 44% year-over-year.

By original rating, YTD volumes have increased year-over-year in US CLO mezz tranches, but triple-A, double-A and single-A tranches have seen declines in BWIC activity compared to the same time last year. The triple-A tranche continues to lead the way in overall BWIC volumes YTD, but is down nearly 50% on last year, totalling US$6.9bn in volume. The JPMorgan analysts note that last year there was elevated US triple-A activity BWIC volumes as investors positioned around Volcker, which is one explanation for the drop this year.

US equity BWIC activity is also down around 35%. The single-B tranche continues to see increasing secondary activity, up over 40% from last year, and is the only tranche to have increased in volume every year for the last five years.

European BWIC volumes are down year-over-year in every tranche except double-Bs and single-Bs. Just as with US CLOs, single-B BWIC volumes have seen the biggest year-over-year increase in Europe and are up 274% from the same point last year.

"The triple-A tranche only represents 14% of the YTD BWIC volumes, which compares to an average of 30% of total BWIC volumes from 2012-2015. The tranches with the highest BWIC volume in Europe this year are the triple-B and double-B tranches. If BWIC volumes continue at their current pace, 2016 would be the first year since we have started tracking CLO BWIC volumes (2012) that European CLO triple-As were not the CLO tranche with the most BWIC volume," note the analysts.

DNTs have accounted for 25% of US CLO BWIC volumes. Single-B and equity tranches have had the highest percentage of BWIC volumes that did not trade this year, at 49% and 51%, respectively.

Last year, DNT volumes averaged US$581m per month, which was 19% of volumes. This year, DNT volumes are averaging US$518m per month, which is 22% of BWIC volumes.

August had the greatest DNTs as a percentage of monthly US BWIC volume at 26%, for a total of US$943.5m. In Europe, 15% of overall BWIC volumes were DNTs, and a strong bid for senior paper was reflected in only 1% of triple-A paper and only 9% of double-A paper failing to trade.

JL

CMBS

CMBS defaults anticipated

More than a quarter of current US non-agency CMBS loans maturing through year-end 2017 will face difficulty refinancing, says Kroll Bond Rating Agency. A spike in maturity defaults is expected in 2Q17.

KBRA believes 26.1% (US$33.4bn) of loans maturing through year-end 2017 will face difficulty refinancing, based on an analysis of 8,590 current non-agency CMBS loans totalling US$128.2bn with maturity dates ranging from 4Q16 to 4Q17. Among the US$33.4bn expected to struggle to procure take-out financing, US$18bn is susceptible to losses totalling US$4.2bn.

Many of those loans are secured by retail and office properties. The agency expects that many of the maturity defaults will occur during 2Q17, when 32.7% of the maturing loans, by balance, are likely to experience refinancing challenges.

The vast majority of CMBS loans maturing between October 2016 and December 2017 are from pre-crisis CMBS. There are 8,352 loans totalling US$111.5bn from pre-crisis CMBS and 238 loans totalling US$16.8bn from post-crisis CMBS.

Loans that are 30 or more days delinquent or that are defeased were excluded from Kroll's analysis. Pari passu notes were treated as individual loans.

Using data from Kroll's credit profile portal (KCP) to calculate KCP LTVs (KLTVs), loans were classified as either having weak, neutral or favourable maturity prospects. Loans with KLTVs of 85% or more, of which there were 1,803 totalling US$33.4bn, were classed as having a weak outlook.

There were 1,398 loans totalling US$20.7bn which had a KLTV greater than or equal to 75% but less than 85%, which were classed as having a neutral outlook. There were 5,389 loans totalling US$74.1bn which had a KLTV of less than 75%, which were classed as having a favourable outlook.

"While many factors influence the ability of a borrower to successfully refinance, we believe KLTV provides a good indicator of future loan behaviour given our expectations for other market dynamics through year-end 2017, including interest rates (which are not expected to materially increase through next year), property fundamentals and the availability of mezzanine financing. Of the US$33.4bn of performing loans with a weak maturity outlook, 79.3% (US$26.5bn) has been identified as a KBRA loan of concern (K-LOC)," notes Kroll.

K-LOCs are loans that are either in default or at heightened risk of default in the near term. Under current market conditions, defaults could lead to losses of US$4.2bn across 1,043 maturing loans. Including K-LOCs that have already defaulted, total potential losses increase to US$7.7bn.

"The largest loss exposure is from loans that are scheduled to mature in 2Q17. Although the liquidation of these assets could take well over a year, transactions with significant maturity exposure in the second quarter are at the highest risk of potential loss," Kroll adds.

By property type, loans collateralised by multifamily and hotel properties are expected to refinance at the highest rate. For these loans, 63.5% and 85.4% of the respective property type segments are identified with a favourable maturity outlook.

Loans collateralised by retail and office properties are identified as posing the most significant refinance risk. Of the loans backed by retail properties, 28.1% have KLTVs of 85% or above, including 12.8% that are in excess of 100%.

For loans collateralised by office properties, 36.9% have KLTVs over 85%, including 24.2% that are north of 100%. Retail and office loans with KLTVs in excess of 100% could yield losses of US$3.2bn.

JL

Insurance-linked securities

Payment history scrutinised

The ability and willingness of catastrophe bond issuers to pay claims in a timely manner continue to be questioned, according to S&P. To test the industry's concerns, the agency identified 13 cat bonds that made claims payments following the occurrence of covered events. Except for one case where the loss payment was dragged out by the reinsured, it saw no evidence that cat bonds lack the ability or willingness to pay claims in a timely manner.

Based on its findings, S&P notes that there have been plenty of covered events and cat bonds have demonstrated their ability and willingness to pay protection buyers. "In our view, cat bonds have an advantage when it comes to willingness to pay," the agency says. "The wording of the contract removes the issuer's discretion regarding whether to pay claims; instead, the loss calculation procedures are set forth in the transaction documents and performed by third parties. Investors may challenge which policies an indemnity cat bond such as Nelson Re covers, which may cause the ultimate payout to be delayed, but there is generally very little uncertainty as to the amount of the loss payment the cedant should receive following an event."

S&P believes there is greater potential for contract uncertainty and disputed claims when cedants buy cover from a traditional reinsurer because of their practice of underwriting risks tailored to specific clients, sometimes without agreeing detailed documentation until after the policy's inception. "Reinsurers' ability to dispute claims helps to protect them from being taken advantage of by cedents, but can also affect a company's reputation in the market and alter our assessment of its competitive position. Due to the contract uncertainty, the relationship issue becomes more important."

For both re/insurance contracts and cat bonds, the timeliness of payments is largely linked to the type and terms and conditions of the policy or bond. The timing of payouts under reinsurance contracts can be influenced by whether the claims are made on an 'occurrence' or 'claims made' basis, the complexity of the risks being covered and whether the reinsurer is likely to dispute the claim. As in the case of willingness to pay, poor timeliness can affect a reinsurer's reputation in the market and alter S&P's assessment of its competitive position.

For cat bonds, payment timing is influenced by which type of calculation method is used to determine the loss, according to S&P. "We would expect parametric triggers to pay the fastest, followed by industry loss triggers. Indemnity triggers are likely to be the slowest."

Muteki and MultiCat - both of which calculated payments using the parametric method - paid the cedant for the covered loss between two and six months after the event. By contrast, where a cedant's actual losses needs to be reported before payments are made, years can pass between an event and the cedant receiving the claim payment.

For example, Kamp Re 2005 paid out in December 2007 for claims arising from Hurricane Katrina, which made landfall on 28 August 2005. Similarly, Avalon Re paid out following three covered events that occurred between 2005 and 2007, but did not make a claims payment until June 2010.

Mariah Re had an industry loss trigger and paid out three months after the loss threshold was reached, the shortest period allowed under the transaction documents. The lawsuit that followed occurred more than a year after the payment had been made to the protection buyer. Two courts decided that the loss calculation procedures were followed in line with the documentation and the claim was dismissed.

To help strengthen cat bond issuers' ability to pay claims, S&P notes that the event definition has to be clear, thereby ensuring that both parties understand what is covered. For example, until Superstorm Sandy occurred, the event definition for cat bonds covering US windstorm risk was typically limited to storms that had been classified as hurricanes at some point in their existence. After observing the damage a named storm that was not a hurricane when it made landfall in the US can do, issuers changed their definitions. For cat bonds covering US windstorm risk written since Sandy, the event definition now includes all named storms.

Defining the covered area is also crucial. In 2015, Hurricane Patricia landed in a part of Mexico where there were no measuring stations, leading to questions about the wind pressure when it entered MultiCat Mexico's covered area.

Both the protection buyer and the investors had to wait until the final hurricane report was published by the National Hurricane Center to ascertain whether a covered loss had occurred. Issuers learned that the covered area for an event definition should be bound by the measuring stations to avoid delays in payment caused by uncertainty in interpolating parameter readings (SCI 6 November 2015).

Finally, issuers have learned to document alternative procedures that can be followed if the initial calculation procedure cannot be followed for any reason. This issue affected the Muteki cat bond, which relied on peak ground acceleration - as observed at Kyoshin Network stations - to determine whether a loss had occurred. As a result of the severe tsunami damage that followed the earthquake event, some observation stations were damaged or swept away, so that the observed parameters could not be reported directly after the event.

CS

RMBS

Coupon floor fix?

Obvion is in the market with its latest Dutch prime RMBS - Storm 2016-II. Provisionally sized at €1.15bn, the transaction is noteworthy because the lender aims to sell the single offered tranche at above par and the pool will be fully revolving for five years, with soft-bullet notes.

The coupon for the offered tranche - the 4.9-year class A notes - is indicated at three-month Euribor plus 60bp and the price (expected to be somewhere over 100) will be used to bring the discount margin to a market-compatible level, according to Rabobank credit analysts. They suggest that the structure seeks to resolve the issue of flooring securitisation coupons against the backdrop of low and increasingly negative interest rates.

"Yesterday's three-month Euribor fixing was -29.9bp," the Rabobank analysts explain. "If priced at par, the coupon margins are unlikely to bring the coupon above zero. In other words, the floor is getting expensive for the seller, especially when one considers the negative carry from the structure's asset side. We note the coupons in this new deal are still floored at zero, but with an indicative coupon of three-month Euribor plus 60bp, the floor is much further away."

Meanwhile, the revolving structure should mitigate prepayment uncertainty. "By selling the notes above par, investors are effectively paying a premium for holding the bonds in the future. But if the future of principal cashflows is uncertain (due to CPR development), there might be less willingness to pay this premium. In this new stand-alone deal, the CPR will be 0% (under normal circumstances)," the analysts add.

Replenishment is subject to strict criteria to maintain the quality of the pool and credit enhancement - of 8% for the senior tranche - is slightly higher than in previous Storm transactions. The provisional pool has a current indexed LTV of 86.4% and average seasoning of 59 months. Comprising 5,729 prime borrowers, NHG-guaranteed loans account for 29.9% of the collateral.

Provisionally rated by Fitch and Moody's, the capital structure consists of: AAA/Aaa rated class A notes (which are expected to make up around 93% of the deal), AA-/Aa1 class Bs, BBB+/Aa3 class Cs, B+/A2 class Ds and NR/Ba1 class Es. Rabobank and JPMorgan are underwriters on the transaction, which is expected to launch next week.

CS

RMBS

Second-loss CAS bonds rated

Marking a first for the market, Fitch has assigned ratings to eight previously unrated M2 bonds from five Fannie Mae credit risk-transfer RMBS issued between 2013 and 2015. The agency had originally only rated the M1 classes in the five transactions, all which have either paid in full or been upgraded (SCI 26 July), reflecting strong performance to date.

The affected tranches are: Connecticut Avenue Securities series 2013-C01 class M2, 2014-C02 2M2 and 2014-C03 2M2 notes (which have been rated double-B plus); series 2014-C01 M2, 2014-C02 1M2 and 2015-C01 2M2 notes (double-B); and series 2014-C03 1M2 and 2015-C01 1M2 notes (single-B plus). All classes were last cashflow, representing the second-loss position in the capital structure because when the CRT programme began neither GSE was selling the first-loss risk. These bonds also benefit from a predetermined loss severity schedule (under which losses have remained below 2bp), rather than being subject to actual losses, as later vintages are.

For the 2013 and 2014 vintage deals, the reference pools have seen several years of seasoning and strong home price appreciation. For example, borrowers who are 60 or more days delinquent account for 15bp or less of pre-defined credit events across the 2013 and 2014 vintages, according to Wells Fargo figures. For CAS 2015-C01, rapid build-up of credit enhancement - expedited by faster prepayment speeds on the high WAC collateral - was likely a more important driver for the upgrade.

Fitch notes that all of the new ratings are assigned to transactions with a legal final maturity of 10 years. The hard maturity limits the timeframe in which losses can be realised. As the transactions season, the agency adjusts its loss expectations to account for the reduced loss exposure window.

Structured product analysts at Wells Fargo suggest that Fitch's action is noteworthy for several reasons. "Until now, all of the rated LCF bonds had at least 1% credit enhancement," they observe. "Given that some of the bonds in this round of ratings action have CE as low as 0.37%, it shows that Fitch is giving credit to the pristine performance in the seasoned deals. Moreover, it was previously unclear how the rating agencies would treat unrated bonds; this event gives the market more clarity and opens the door for more unrated bonds to be assigned ratings."

While Fitch only considered CAS deals this time, the Wells Fargo analysts note that it would not be surprising if seasoned Freddie Mac STACR LCF bonds eventually receive ratings as well, considering the similar collateral profiles.

CS

Structured Finance

Receivables platform bolstered

Demica has appointed Daniel Kustrin as chief technology officer, responsible for overseeing the growth and development of the firm's proprietary financing platform. Reporting to Demica ceo Matt Wreford, he is expected to play a key role as the firm invests significantly in new product development in response to client demand.

Kustrin was previously global head of technology at Cardano Risk Management, where he was responsible for development and infrastructure across locations in the UK and the Netherlands. Before that, he was global head of quant, derivatives and risk technology at Barclays Capital.

Structured Finance

Interim chief named

Stephen Joynt has been appointed interim ceo of DBRS. He will continue to serve as executive chairman of DBRS Group.

Daniel Curry, who has served as ceo of DBRS since December 2013, is leaving the agency to pursue other interests.

Structured Finance

SF department launched

Gattai Minoli Agostinelli & Partners has launched a structured finance department. It will be run by four new hires - all from Legance - and signals the continuation of the Italian firm's expansion into new practice areas.

The department will be headed up by Emanuela Campari Bernacchi, who will be an equity partner, and will work alongside senior associate Valentina Lattanzi and associates Salvatore Graziadei and Allegra Arvalli. This brings the total number of lawyers at the firm to 81, including 23 equity partners.

Bernacchi was most recently a partner at Legance in the banking and debt capital market practice focusing on all aspects of structured finance. Prior to Legance, she had worked at Gianni Origoni Grippo, as well as in the structured finance team at Freshfields, Bruckhaus, Deringer.

Bruno Gattai, founding partner of Gattai Minoli Agostinelli & Partners, comments: "The appointment of Emanuela and her team is of great strategic importance for the firm, given the long season ahead for banks and investors to dispose and manage non-performing loans. The firm aims to play a key role in this arena, as well as in the fintech one."

Structured Finance

Ashurst trio poached

Paul Hastings has recruited a trio of structured finance partners - Michael Smith, Diala Minott and Cameron Saylor - from Ashurst in London.

Smith focuses on structured finance, securitisation, capital markets, credit funds and derivatives. He has been involved in the structured finance market for over 20 years and has had a key role in the development of several financial products.

Minott specialises in credit funds and CLOs, with a particular expertise in Luxembourg regulated credit funds. She has advised numerous sponsors in connection with funds using a range of innovative structures.

Saylor specialises in structured finance and securitisation, with a particular emphasis on CLOs. He has a wide range of experience, advising both arrangers/underwriters and collateral managers.

Structured Finance

NexPoint targets BDVC takeover

NexPoint has set out its proposals for a proposed takeover of the Business Development Corporation of America (BDVC), including a permanent 50% reduction of both BDVC's management and incentive fee arrangements. The proposal comes as a counter offer to BSP Acquisition's own outline for purchasing the company and in response to BSP's reluctance to consider NexPoint's approach. 

NexPoint says its proposal will include the direct investment of at least US$50m in BDVC's shares, as an attempt to trump BSP's undisclosed investment figure. In addition, the proposal outlines the implementation of a unique stockholder loyalty programme, under which NexPoint provides a 2% match to stockholders that invest through the programme and retain their shares for at least one year.

Based on NexPoint's projections, it also outlines that its offer will lead to "materially reduced fees and additional liquidity" from direct investment, in comparison to BSP's offer. Based on BDVC's net asset value as of 30 June, NexPoint explains that its proposed fee discounts would provide over US$175m of aggregate fee savings over the next ten years, assuming an annual 8% return.

NexPoint is using the offer as a mandate to now meet and discuss its proposal with the BDVC board, as well as inviting the board to propose other appropriate terms. This follows the board's non-response or consideration to date for NexPoint's offer.

Structured Finance

TPG raises stakes

TPG Specialty Lending (TSLX) has written to the independent directors of TICC Capital Corp - Steven Novak, Peter O'Brien and Tonia Pankopf - urging them to answer six questions as part of an objective evaluation of TICC's underperformance ahead of its annual meeting on 2 September. The move follows TICC's letter to its stockholders suggesting that TSLX has run a "misleading, self-serving campaign" that puts its own interests ahead of stockholders' interests.

In its letter, TSLX notes several discrepancies between TICC's public statements and the reality of its investment portfolio and recently reported financial performance. TSLX is the largest single stockholder of TICC and says it continues to be frustrated by the actions taken by the company's external adviser to avoid a constructive dialogue regarding its operations and results.

The firm cites TICC's refusal to issue its Form 10Q report prior to its earnings call with stockholders as one example. "Not only does this demonstrate a profound lack of respect for the views of TICC's stockholders and equity research analysts, it prevents any meaningful public discourse regarding TICC's performance, strategy and execution, thereby enabling poor performance to continue unchecked," it comments.

As a result, TSLX says it feels obligated to raise publicly several important questions on behalf of all stockholders regarding the state of their investment. The first question is in connection with the change in the level yield at which TICC recognised GAAP revenue from CLO equity investments in 2Q16. The firm notes that level yield increased to 12.8% from 8.5% in Q1, yet key metrics reflecting the underlying strength of these investments appear to have deteriorated.

The second question is why the 14 cents per share in realised losses in 2Q16 was not highlighted to stockholders, while the third is why TICC's external adviser collected a net investment income incentive fee in Q2 when the company reported realised losses of US$7.3m. The fourth question is whether the company has actually implemented a new investment strategy in line with its stated aim to rotate out of CLO equity over time (SCI passim).

TICC purchased US$37.9m of CLO equity during Q2, representing 51.6% of the quarter's new investment activity. CLO equity investments now represent approximately 32% of TICC's total investment portfolio at fair value, which TSLX describes as "a meaningful increase" from 1Q16.

The fifth question raised by TSLX is why TICC stated on 18 August that its new investment strategy is already yielding results. Specifically, the firm urges TICC to explain the discrepancy between how the board describes its investment strategy and the reality of the performance of its portfolio.

The final question pertains to stockholders judging the performance of the company for as long as management has been in charge and not from the bottom of the market. TSLX notes that since its IPO in 2003, TICC has delivered underperformance of negative 182.9%, compared to the BDC composite. Further, TICC's investment strategy has resulted in a 52% decline in net asset value per share since 2004.

The TSLX letter states: "You have argued that stockholders should look only at a single period of time - since 2009. However, we find it misleading to only look at the company's results since 2009, because your results since that point essentially reflect a recovery from your severe underperformance relative to peers prior to and during the financial crisis."

TSLX has been campaigning to bring about change at TICC and a vote on terminating the company's current investment advisory agreement is set for 2 September. However, TICC argues that it is "working hard" to improve and to maintain the current distribution policy. Further, it says that TSLX has not articulated any plan and is putting stockholder investments at risk, as terminating the investment advisory agreement could result in TICC being left with no investment advisor, management team or operational infrastructure.

Structured Finance

Turner preps fixed income push

Turner Investments has named Stefania Perrucci as global head of fixed income, in line with the firm launching a series of fixed income, credit and absolute return investment strategies. In this newly-created position, she serves on Turner's investment committee, as well as on its fixed income/credit, yield/income and absolute return investment sub-committees.

Prior to joining Turner, Perrucci was the founder of New Sky Capital, where she served as cio for a macro, fixed-income relative-value fund. She was also previously a fixed income portfolio manager for Morgan Stanley and began her investment career as a senior risk specialist at International Finance Corporation.

CDO

ABS CDO manager replaced

Dock Street Capital Management has replaced Declaration Management & Research as collateral manager for Independence VI CDO. Under the terms of the appointment, Dock Street agrees to assume all the responsibilities, duties and obligations of the collateral manager under the applicable terms of the collateral administration agreement.

Moody's has determined that the appointment will not negatively impact any of the ABS CDO's current ratings. In reaching its conclusion, the agency considered the experience and capacity of Dock Street to perform collateral management duties for the issuer.

For other recent CDO manager transfers, see SCI's database.

CDO

Ischus management affirmed

Moody's has issued another change of control notice in connection with a Resource America entity, following the firm's merger with C-III Capital Partners (SCI 26 August). The agency confirms that the assignment of the collateral management agreement entered into by GSC ABS CDO 2006-4u, currently managed by Ischus Capital Management, will not negatively impact any of the ABS CDO's ratings.

The assignment is the result of a change of control of Ischus, but does not alter the responsibilities, duties and obligations of Ischus as collateral manager, according to Moody's. The agency adds that no changes are currently planned to the principal personnel at Ischus responsible for managing the deal.

Insurance-linked securities

Vario adds ex-JPM pair

Vario Partners has appointed Markus Gesmann as head of research and modelling and Mike Kontaratos as head of investment. The ILS structuring and investment firm says the appointments mean its team of experts is now complete, with all elements now in place to complete transactions and build the Vario funds.

Gesmass joins from Lloyd's of London, where he led analysis function and was responsible for market-wide analytical research and development. He has also worked in JPMorgan's securitisation group, where he specialised in insurance.

Kontaratos joins directly from JPMorgan, where he was vp in the securitised products group, focusing on ABS origination in the UK, Netherlands, Greece and Cyprus. He joined JPMorgan in 2003 and also has experience in CDO structuring.

RMBS

Ocwen settles offshore charges

Ocwen Loan Servicing has agreed to pay a US$900,000 settlement fee over allegations that it used offshore unlicensed affiliates to perform residential mortgage servicing activities for Washington-based loans. The settlement was made with the Consumers Services Division of the Washington State Department of Financial Institutions (DFI).

The agreement included Ocwen dropping such practices, after it allegedly used companies in the Philippines and India to perform mortgage loan servicing activity under Washington law. According to the DFI, the companies that were used were Ocwen Business Solutions and Ocwen Financial Solutions Private Limited. The latter was believed to be engaged in such activities as far back as August 2010 and the former between June 2013 and August 2015.

ABS

Auto finance growth to continue

EMEA auto ABS performance should stay strong, says Moody's in the first of its new EMEA auto ABS sector update reports. The new quarterly reports will provide commentary on macroeconomic factors and regulation that affect EMEA auto ABS, new ratings and rating actions, as well as new issuance and performance trends.

Some countries are set to outperform others as a result of diverging growth rates. The growth in the size of captive and non-captive car financiers that occurred over 1H16 should continue, the rating agency says.

"Collateral pools across EMEA auto loan and lease ABS continue to show strong performance, with low interest rates enabling borrowers to continue to afford their monthly instalments," says Moody's avp Schajan Abbas. "Better performance is reflected in the number of tranches of outstanding transactions that we have upgraded."

Moody's expects growth in captive and non-captive car financiers' books due to the availability of wholesale funding at attractive spreads and improved financing terms, driven by rates that are attractive for customers. Furthermore, there is an increasing trend towards lease financing with a larger balloon payment component and smaller monthly instalments, enticing a greater number of borrowers by offering flexibility with payment plans at cheaper prices.

There is also a move towards longer auto contract terms, particularly in the UK. While this will allow borrowers to lower their instalments, it could also increase the weighted average lives of ABS portfolios, increasing noteholders' exposure to credit risks over a longer period.

Structured Finance

New Chinese structure 'credit positive'

The introduction of a new type of asset-backed note in China which incorporates a trust structure is credit positive for the fledgling sector, says Moody's. The first such deal was issued by International Far Eastern Leasing Co in June and was backed by lease receivables.

Asset-backed notes with a trust structure provide better asset ring-fencing protection for investors than was the case with the traditional Chinese asset-backed note structure, therefore expanding the scope for corporates to raise funds through notes issued on China's interbank bond market, says Moody's. In the trust structure, the assets are entrusted to a special purpose trust (SPT), thus separating the entrusted assets from the bankruptcy estate of the settlor and trustee. Under the old structure, assets used to support the notes would remain part of the liquidation property of the insolvent issuer.

The ring-fencing protection provided by the structure is similar to that provided under China's credit assets securitisation (CAS) scheme, which is regulated by the People's Bank of China and the China Banking Regulatory Commission (CBRC), under which banks and non-bank financial institutions can issue securitisations.

There have been 82 asset-backed note deals, worth a combined CNY26.29bn, issued since 2012. Moody's believes this low issuance is possibly because of the traditional structure's lack of bankruptcy remoteness, which more resembles senior secured debt than securitisation paper.

CLOs

CLO pay-downs slow

CLO pay-downs in JPMorgan's CLO index (CLOIE) dropped since the July rebalance through 31 August to US$5.36bn, after a dramatic rise the previous month. This was split between US$3.94bn and US$1.43bn of pre-crisis and post-crisis CLOs.

The post-crisis CLOs added US$5.5bn with 75 tranches from 15 deals at the July rebalance. Meanwhile, the pre-crisis index returned 1.15%, outperforming its post-crisis counterpart at 0.48%, high grade bonds at 0.28% and leveraged loans at 0.76%.

All CLOIE sub-indices experienced positive returns for the second month in a row, with the best performing tranche being the post-crisis single-B tranche, returning 7.39%. CLOIE total discount margins also continued to grind in, tightening across the stack by up to 102bp this month.

CMBS

ITT default risk highlighted

The US Department of Education's recent action against ITT Educational Services may increase default risk for US$123.1m in CMBS with exposure to the company, according to Morningstar Credit Ratings. In a move that may force ITT to cease operations, the Department announced on 25 August that it has banned the for-profit educational provider from enrolling new students that use federal financial aid and requires it to more than double its surety fund to US$247.3m.

ITT received US$580m in federal aid - or 68% of its almost US$850m in total revenue - in 2015, according to the Department. Regarding the actions taken against the company, US Secretary of Education John King stated that it "would not be responsible or in the best interest of students to allow ITT to continue enrolling new students who rely on federal student aid funds".

Given the severity of the actions taken against ITT, Morningstar believes that the risk of bankruptcy and subsequent lease rejections is significantly elevated. The agency identified nine properties backing CMBS loans that have ITT as a tenant, all of which are securitised in recent-vintage deals, including three assets in 2016 issuances.

If ITT were to vacate these properties, only Commerce Point I & II (securitised in CGCMT 2015-GC29) would retain occupancy above 85%. Morningstar suggests that the Barringer Technology Center loan (MSBAM 2016-C29) faces greater risk of default if ITT leaves, given its low debt service coverage ratio of 1.2x, which would decline to 0.80x.

The Department of Education has increased its scrutiny of for-profit education providers over the past several years, resulting in the shuttering of entire brands and hundreds of locations nationwide (SCI 27 May).

CMBS

Multi-borrower NOI up

Net operating income (NOI) for properties within Fitch-rated US multi-borrower CMBS increased by 3% year-over-year in 2015. This compares to 3.2% of NOI growth in 2014, 2.5% in 2013 and 2.5% in 2012.

Year-over-year NOI increases for the major property types from 2014 to 2015 were: 5.4% for multifamily (compared to 3.8% from 2013 to 2014); 5.1% for hotel (8.1%); 2.8% for industrial (1.4%); 1.5% for retail (2.1%); and 1.1% for office (1.5%). Multifamily NOI growth was driven by strong performance in Texas (accounting for 574 loans totalling US$7.34bn), California (464 loans totalling US$6.64bn) and Florida (261 loans totalling US$3.81bn), which reported NOI gains of 6.4%, 8.2% and 7.6% respectively. North Dakota reported the largest double-digit NOI decline, at over 18%, largely due to the impact of low oil prices.

Hotel properties also led NOI growth, albeit at a slower pace compared to last year, which reflects the sector reaching its peak in many regional markets. NOI improved by 13% for California (118 loans totalling US$2.26bn) and by nearly 8% for Florida (77 loans totalling US$1.44bn). However, New York (66 loans totalling US$1.5bn) and Texas (94 loans totalling US$1.41bn) reported NOI declines of nearly 6% and 7% respectively.

CMBS

US CMBS loss severities drop

US CMBS loan losses fell below the historical weighted average loss severity during 2Q16, notes Moody's. The weighted average loss severity was 41.3% for the 229 loans liquidated during the quarter, down from 49.3% for the 139 loans liquidated in 1Q16 and also down from the historical weighted average of 42.8% for loans liquidated between 1 January 2000 and 30 June 2016.

"The main reason for the decline in the quarterly loss severity in the second quarter was the inclusion of several mega loans with a loss of just the 1% servicing fee, which resulted in a drop in the loss severity for loans liquidated from the 2006 vintage, to 25.2% from 48% the prior quarter," says Moody's associate md Keith Banhazl. "This vintage accounted for 55% of the liquidated loans by balance last quarter, while nearly 66% of the 2006 vintage liquidations were a result of a maturity default."

Loans liquidated after a maturity default typically had lower loss severities than loans that defaulted during their terms. Loans liquidated from the 2006 vintage in the second quarter had a loss severity of 25.2%, compared to 48% in the previous quarter. Cumulative maturity defaults for the 2002-2007 vintages had a weighted average loss severity of 21.2%, compared to 51.6% for term defaults.

During 2Q16 three loans were liquidated with a disposition balance of more than US$100m with loss severities of just 1%. All three were a result of maturity defaults from the 2006 vintage. The largest was the Warner Building loan, with a disposition balance of US$292.7m.

CMBS

Office Depot closures analysed

Office Depot's announced plans to shut down 300 stores over the next three years has elevated the risk on US$956.6m in mortgages tied to CMBS, says Morningstar Credit Ratings. The riskiest loans are those with leases expiring before the end of 2018, with either a DSCR below 1.2x or a collateral vacancy rate that falls below 80% if Office Depot were to vacate.

Overall, there are 281 loans with an allocated property balance of US$4.49bn in CMBS with exposure to Office Depot. While not all loans are at risk in the short term, Morningstar expects to see additional store closures, as office-supply retailers are forced to adapt to a changing retail environment.

Although a planned merger with Staples did not pan out, it is likely that Office Depot will also close stores near Staples locations. As a result, Morningstar sees heightened risk in 66 properties, totalling US$1.35bn, with exposure to Office Depot stores that are within three miles of a Staples store.

Some large deals are believed to be relatively safe due to their strong DSCRs, but the agency adds that not all are impervious to the risk, particularly where they have already been underperforming. Morningstar sees risk of a value decline for the US$55.8m Marketplace at Northglenn loan, the largest asset in Morgan Stanley Capital I Trust 2006-HQ8 - making up 19.4% of the deal. The REO property was operating at a 0.4x DSCR, as of 31 March. If Office Depot were to leave, the occupancy would fall to 72.1% from 79%, with a projected loss of US$22m on the property.

Occupancy risk is also a concern, as the company - which operates both Office Depot and OfficeMax stores - occupies over 20% of the gross leasable area at 99 properties and 100% of the GLA at 23 of these locations. In total, the occupancy at 153 properties, backing CMBS loans with a combined balance of US$1.61bn, could fall below 80% if Office Depot were to vacate.

Even loans in which Office Depot occupies a smaller part of the GLA could face refinancing issues if they lose the tenant, as the vacant space could indicate problems to lenders. Morningstar has identified 109 such loans, with a property balance of US$1.82bn, that are set to mature by the end of 2018.

CMBS

Dispositions inch up

August US CMBS disposition volume inched up slightly from July and came in above the six-month average of US$641.6m. Trepp reports that 71 loans totalling US$722.5m were disposed of in August, compared to US$681m in July and US$809.3m in June. Average loan size continues to hover slightly above single digits at US$10.2m.

Including six smaller loans with a remaining balance of below US$10m, 11 office and retail loans totalling US$187.6m paid off with losses of 100% or greater last month. Written off with a 100% loss severity, the US$65.2m Chapel Hill Mall topped the list of loans that incurred the highest losses during August (see SCI's CMBS loan events database).

Three major office loans that resolved with complete losses this month include the US$41.3m AT&T Consumer Services Headquarters, the US$22.2m Colonial Office Park and the US$21.3m Blue Bell note. All three loans reported significant vacancies above 50% for the 2015 fiscal year.

August loss severity rose over eight percentage points to 48.85%, due to several mid-sized loans that closed out with sizable losses. Looking only at losses greater than 2%, volume was US$560.1m with a 62.79% loss severity.

NPLs

Colony offloads NPLs

Colony Starwood Homes has sold a US$266m portfolio of 1,675 NPLs to an affiliate of Starwood Capital Group. The completion of the sale is a major step towards the REIT's exit from the NPL business.

The portfolio was auctioned with the assistance of Credit Suisse, following the recent joint venture between Colony and Prime Asset Fund VI, in which Colony has been using Prime to conduct its NPL operations. They have worked together to now generate over US$330m of loan and REO sale proceeds since 30 June, resulting in approximately US$140m in cash proceeds after associated debt pay-downs.

Colony now owns approximately US$120m in book value of assets through its joint venture with Prime, with the distribution roughly equal. They expect to dispose of the remaining assets by the end of 1H17. The planned proceeds will go towards winding down the NPL business for general corporate purposes, including the acquisition and renovation of single-family rental homes.

Risk Management

CFTC extends swap dealer deadline

The US CFTC's division of swap dealer and intermediary oversight has issued a no-action letter stating that, in the period up until 3 October 2016, it will not recommend an enforcement action against a swap dealer subject to the 1 September compliance date for its uncleared swap margin rules in the event of failure to comply. Due to certain practical and technical limitations, the Commission believes it is appropriate to provide this relief when a swap dealer is making diligent, good faith implementation efforts in this period of transition.

Risk Management

SIMM facility launched

ICE Benchmark Administration (IBA) has launched a crowdsourcing facility for the ISDA Standard Initial Margin Model (ISDA SIMM) with the introduction of new margin rules for non-cleared derivatives becoming effective yesterday (1 September). The initiative is already supported by 16 global banks that are submitting risk data to the facility. This number is anticipated to grow alongside industry adoption of ISDA SIMM, which also launched yesterday.

The ISDA SIMM is a common methodology for the calculation of initial margin requirements for non-cleared derivatives (SCI passim). The methodology was developed as part of ISDA's Working Group on Margin Requirements (WGMR) implementation initiative to help market participants meet new margin BCBS-IOSCO rules for non-cleared derivatives.

Under US, Japanese and Canadian rules, the largest derivatives users have now begun posting initial and variation margin on their non-cleared trades. More jurisdictions are expected to follow shortly, while other entities will be phased into the margin rules over the next four years.

"A lot of complex development and implementation work has been achieved in an extremely tight time frame, as final rules from domestic regulators were published relatively late in the process. Now that the first-wave of large banks are implementing the requirements, ISDA will continue to respond to the even more challenging task of preparing for roll-out of variation margin requirements in March 2017, which will apply to a much wider universe of firms, as well as integrating the rest of the phase-one firms as other jurisdictions implement their final rules," comments ISDA ceo Scott O'Malia.

As the provider of the crowdsourcing facility, IBA manages the aggregation and compilation of risk data, so market participants can implement the ISDA SIMM consistently. In addition, the facility ensures that consensus results - obtained via a voting mechanism - are used for the margin model's risk buckets and weightings.

Risk Management

MiFID reference service offered

Trax has launched a MiFID instrument reference data service to assist firms in overcoming the regulatory challenge of correctly identifying reportable instruments. The service, known as Trax MiFID List, provides a view on MiFID I reportable instruments and an early indication of MiFID 2 eligibility.

Trax says that it is working with its clients to integrate this value-add service into the Trax regulatory reporting solution, with inputs including intra-day feeds from data vendors, exchanges, national numbering agencies and issuers, which are cross-checked with the ESMA MiFID database. The suite of MiFID 2 transaction reporting and transparency tools will be available through the customisable web system, Trax Insight.

Risk Management

SEC adopts data repository rules

The US SEC has adopted amendments to provide regulatory and other authorities access to data obtained by security-based swap repositories. SEC chair, Mary Jo White, says the adoption will allow for increased transparency and reduced threats to the financial stability of the swaps market.

Building on a proposal from September 2015, the final amendments implement provisions for the Dodd-Frank Act, in addition to a number of others. These include the requirement of either a memorandum of understanding or other arrangement between the SEC and data recipient to address the confidentiality of exchanging swap data.

Further, the amendments identify the five prudential regulators named in the statute, as well as the Federal Reserve banks and the Office of Financial Research as being eligible to access data. They also address factors that the SEC may consider in determining whether to permit other entities to access data. Finally, they include a conditional exemption to a statutory requirement that data recipients from repositories had to indemnify those repositories.

RMBS

NPL RMBS tranche pays off

The first Fitch-rated post-crisis RMBS tranche backed partly by NPLs has paid off. The single-A rated US$35m class A1s in Mortgage Fund IVc Trust 2015-RN1 paid off in full this month, ten months after the transaction closed in October 2015.

At issuance, roughly one-third of the mortgage loan pool was 90 or more days delinquent or in foreclosure, with an additional 14% at 30- to 60-days delinquent. But the percentage of the pool that is 90 or more days delinquent has declined since issuance from roughly one-third to one-quarter of the remaining pool.

The transaction has a sequential principal payment waterfall, in which the A1s received all scheduled and unscheduled principal payments before the A2s received any principal payments. Since it was issued last year, the A1 tranche received monthly principal payments averaging roughly US$3.4m.

The mortgage pool has incurred roughly US$20.8m of realised losses since issuance, comprising US$14.4m of loss from liquidations and US$6.4m of loss from deferred principal modifications. However, Fitch says that the A1s have been well protected against realised pool losses to date. In addition to the US$205m of credit enhancement provided by the unrated A2s, both the A1s and A2s also had roughly US$111m of overcollateralisation at issuance to absorb collateral losses.

RMBS

RMBS hit by servicing transfer

Moody's has placed the ratings of six certificates from five Mexican RMBS sponsored by Hipotecaria Su Casita on review for downgrade. The move reflects the agency's concerns about the future performance of the transactions, following the servicing transfer from Santander Vivienda to Pendulum.

The transfer caused a considerable decline in collections for all Su Casita's deals in the month following the transition in July, according to Moody's. Pendulum cites certain operational issues - such as a delay in sending invoice notifications to borrowers and the fact that some collections were deposited into the accounts of Santander - as the main reason for the higher delinquencies and lower collections.

The affected deals are BRHSCCB 06, BRHSCCB 06-2 & BRHSCCB 06-3, BRHSCCB 06-5U & BRHSCCB 06-6U, BRHSCCB 06U & BRHSCCB 06-2U and BRHSCCB 07 & BRHSCCB 07-2. The reduction in collections, combined with an initial set-up fee charged by the substitute servicer, reduced the available cash after paying trust expenses and affected the payment of interest - resulting in a partial interest shortfall payment for the BRHSCCB 06-5U certificates and a full interest shortfall payment for the BRHSCCB 06-6U certificates.

Moody's review will focus on the performance of the affected transactions and liquidity risk, which could cause an interest payment default on the rated certificates. The agency says factors that would lead to a rating downgrade are further deterioration in reported collections, cash availability in the transactions and pool performance.

The collateral backing the affected transactions consists of first-lien fixed-rate mortgage loans denominated in UDIS or Mexican pesos and granted primarily to low-income borrowers.

RMBS

Refi programmes 'credit positive'

Fannie Mae and Freddie Mac's new refinancing option for borrowers with high LTV ratios is credit positive for their credit risk-transfer transactions, says Moody's in its latest Credit Outlook. The announcement of the plans last week by the FHFA (SCI 26 August) will allow underwater homeowners with GSE mortgages to retire and replace those loans.

Moody's explains that if affected mortgages linked to the CAS and STACR deals are retired, the borrowers can no longer default on the mortgage. In addition, higher prepayments from borrower refinancings would boost the credit enhancement protecting the senior and highest-ranking mezzanine tranches of the deals.

The agency says that the new refi programmes are similar to the Home Affordable Refinance Program (HARP), which began after the financial crisis in 2009 and was subsequently extended by the FHFA. But in contrast to HARP, homeowners can use the new Fannie Mae and Freddie Mac refi programmes regardless of the origination date of their mortgage and multiple times.

Borrowers must be current on their payments over the previous six months to qualify for the new programmes, which will limit the benefits. However, they will not be subject to a minimum credit score or maximum debt-to-income ratio requirements. Fannie Mae's programme will be available to borrowers with current LTVs of 97% or higher, while Freddie Mac's limit will be 95%.

Although very few borrowers with loans tied to the CAS and STACR deals have current LTVs that would allow them to use the programmes, they will offer protection against adverse scenarios involving home price declines. In such scenarios, CAS and STACR notes tied solely to borrowers with initial LTVs exceeding 80% would especially benefit, because those borrowers could use the programmes after only somewhat modest declines in national or regional home prices.