Contents

Secondary markets

Euro secondary stays positive

The positive tone continues across the European securitisation secondary market.

Although the US public holiday has hampered activity so far this month, secondary spreads across European ABS/MBS and CLOs have continued to edge in since 1 September. UK non-conforming paper continues to lead the way boosted by the dearth of primary supply and the upcoming Aire Valley refinancing, combined with the lack of wider market volatility in reaction to the Brexit vote.

There are currently two BWICs on the European schedule for today. First, is a seven line ABS/MBS euro-sterling mix due at 14:30 London time.

The 24.746m list comprises: BUMF 4 B, BUMF 5 M1, BUMF 6 M1, ECLIP 2007-2X C, GMG 2015-1 X1, NDPFT 2015-1 D and NDPFT 2015-1 F. None of the bonds has covered on PriceABS in the past three months.

Then, at 15:00 there is a €13.28m seven line 1.0 and 2.0 CLO combination, which consists of: ACAEC 2007-1X B, ACAEC 2007-1X C, ALPST 1 B, AVOCA 12X A, AVOCA 14X C, NPTNO 2007-1X AT and TIKEH 2015-1X BV. Five of the bonds have covered on PriceABS in the last three months - ACAEC 2007-1X C at 99.807 on 25 August; ALPST 1 B at 99.76 on 25 August; AVOCA 14X C at 100.185 on 24 August; NPTNO 2007-1X AT at 99.25 on 25 August; and TIKEH 2015-1X BV at 100.271 on 24 August.

Secondary markets

Euro CLO rally continues

The widespread tightening in the European CLO secondary market is continuing.

"We saw the rally accelerating in the second half of August and that's kept going in September so far," says one trader. "Tightening hasn't been the usual summer result of just a handful of trades - there were a lot of flow trades in August and that's carried on this week with demand pretty broad across the European investor base."

While tightening has been seen across the capital structure and vintages, the biggest moves have come in more recent bonds, the trader notes. "The dramatic change in DMs has come in 2.0s - triple-Bs, for example, have moved from LM400s in early August to 380-390 now. Consequently, a lot of 2.0 trades are now going through above par, which was unheard of even a year ago."

There could be a change in dynamic ahead, however. "The rally has been boosted by a dearth of primary and secondary supply," the trader says. "But there are five or six new deals due in the coming weeks, so it will be interesting to see if that results in some pricing pressure or if the deals are easily absorbed."

There is currently one BWIC on the European CLO schedule for today. At 15:00 London time, there is a three line €8.77m original face list comprising: BACCH 2007-1 E, HEC 2006-CA E and NWEST III-X E. None of the bonds has covered on PriceABS in the past three months.

Secondary markets

US CLOs still tightening

The US CLO secondary market is continuing its summer surge into September.

"The key theme is that spreads are continuing to tighten, particularly in the senior territory," says one trader. "Double-As and triple-As are trading either close to or above par. There is also a triple-A BWIC today that includes some decent names and should perform similarly."

Meanwhile, the spread rally is continuing to permeate down the 2.0 stack too. "Triple-Bs are also tightening where there's some seasoning - you're looking at the 2012 and 2013 vintages," the trader says. "These are mostly bonds out of, or close to, reinvestment."

However, the trader adds that 1.0s are being hampered by potential call scenarios. "A lot of 1.0s are trading at a discount, which is leading to speculation that they will be called sooner. As a result, we're finding it hard to justify investing in such bonds to our clients."

There are currently four BWICs on today's US CLO calendar, including the above mentioned triple-A auction at 11:00 New York time. The $52.45m eight line list comprises: ACASC 2014-1A A, ADML 2014-1A A2, ATRM 8A A1, CGMS 2014-2A A, CECLO 2013-17A A1, GALXY 2014-17A A, LCM 16A A and SNDPT 2014-2A A1.

Three of the bonds have covered with a price on PriceABS in the past three months - ATRM 8A A1 at 100.18 on 7 September; CECLO 2013-17A A1 at 99.71 on 23 August; and LCM 16A A at 100.35 on 7 September.

Structured Finance

SCI Start the Week - 5 September

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

Pipeline
It was another quiet week for the pipeline as the Labor Day weekend came into view. At the final count there were three ABS, one ILS, four RMBS and four CMBS added.

€800m Ginkgo 2016-PL1, US$533.9m PHEAA Student Loan Trust 2016-1 and US$941.49m WOART 2016-B accounted for the ABS. The ILS was US$250m Nakama Re Series 2016-1.

US$221.3m COLT 2016-2, Pepper Residential Securities Trust No.17, STACR 2016-HQA3 and STORM 2016-II were the RMBS. The CMBS were US$900m CFCRE 2016-C5, US$950m MSBAM 2016-C30, US$1bn WFCM 2016-LC24 and US$1bn WFCM 2016-NXS6.

Pricings
Even fewer deals came out of the pipeline. The only ABS print was £248m Newday Funding 2016-1, while the only RMBS was US$430m JPMMT 2016-2.

Markets
The US CLO market remained active last week, as SCI reported on Thursday (SCI 1 September). US CLOs were busy for most of August, defying the summer lull engulfing most other markets.

There was some activity in European CLOs, as SCI reported last week (SCI 1 September). However, other European markets were quiet, as had been expected. Three BWICs were scheduled for last Thursday.

Editor's picks
Triple crown: 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...
Picking up PACE: 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...
Internal versus external: The AIFMD's stipulation that alternative investment funds must engage the services of a third-party valuation firm has prompted a growing trend for independent firms to be employed as part of a fund's internal valuation process. Very few managers wish to appoint firms in an external valuation capacity, however, and few valuation firms are willing to take this role on...
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...
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...
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...

Deal news
• Churchill Asset Management returned to the US CLO market last week with a deal of several 'firsts'. TIAA Churchill Middle Market CLO 2016-1 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.
• 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.
• 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 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.

Regulatory update
• 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.
• 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.
• 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).

CMBS

Mall sentiment eyed

The price of CBL & Associates Properties' stock moved higher over the course of August, while the Markit CMBX.BB.6 index moved lower, marking the first time this year that the two have disconnected. Morgan Stanley CMBS strategists believe this disconnect may present an opportunity and suggest three different trades through which to capitalise on it.

"The debt markets are pricing in increasing risk on lower quality malls, but the equity markets are attracted to them, given high dividend yields," they observe.

Over the past month or so, several lower-productivity malls have been sold, some of which are referenced in CMBX.6. The Morgan Stanley strategists highlight two of these properties that sold at 20% discounts, showing that property values have declined since the loans were originated.

"Most of these sales had assumable debt and one could argue that cap rates would be higher if that was not the case," they observe. "We believe these sales mitigated default risk over the term of the loans - given attractive levered returns to the new buyers - but there is heightened maturity default risk, given minimal equity in the properties."

CBL itself has financed 23 malls totalling US$1.6bn via CMBS 2.0 loans, of which seven are referenced in CMBX.6. The firm's stock recently received a boost from stronger-than-expected earnings and the conclusion of the US SEC investigation into four loans (SCI 16 June) with no enforcement.

"Recent sales have reinforced our view that the implied cap rate on CBL's portfolio of malls is in the low double-digits versus a market-implied cap rate of 9.4%, but this may be a longer-term refinancing concern. On the other hand, CBL's 7.5% current dividend yield compares to the mall average of 4.1%, which is attractive near term given the market's search for yield. The question becomes if the equity market continues to trade on yield or could the debate shift back to mall fundamentals?" the strategists ask.

The difference between the spread of CMBX.BB.6 and CBL's dividend yield stood at 118bp last month, compared to an average of - 40bp since the launch of CMBX.6 on 25 January 2013, ranging from a maximum of 275bp to a minimum of -364bp. In fact, the spread of BB.6 has only traded wider than CBL's dividend yield 27% of the time, according to Morgan Stanley figures.

Against this backdrop, the first trade put forward by the strategists is to sell CBL, on the assumption that there is greater risk in lower quality malls than the equity markets perceive. The second trade is to buy CBL and short BB.6, if loans on lower quality malls are perceived to be able to withstand rising default risk without impacting REIT earnings. The final trade is to go long BB.6, if CBL's stock performance suggests that concerns on lower quality malls are overdone.

CS

ABS

Lender seeks asset-backed future

Fintech consumer lender Uberima has appointed Richard Bartlett as cfo to help drive the shift to an asset-backed funding model. Bartlett is a member of the board for Prime Collateralised Securities and was previously at RBS, where he held various roles in securitisation and debt capital markets and rose to head of coverage and debt capital markets.

Uberima intends to differentiate itself via the technology it will use for credit decisions. The firm will offer short-term consumer loans and compete with payday lenders.

Structured Finance

BlueBay adds senior analyst

BlueBay Asset Management has hired Marcus Maier-King as a senior credit analyst. In this role, he will leverage his experience in direct investment, mid-market financing, mezzanine, and CLO investments and restructuring. He joins BlueBay from European Capital Financial Services, where he was an investment director.

Structured Finance

CLO expert joins Dentons

Dentons has recruited Martin Sharkey as a partner to its banking and finance practice in London. He joins from Clifford Chance, where he led its European CLO practice, which included advising on ABS products, portfolio sales and structured finance transactions. Sharkey's clients include banks, global investment management firms, asset managers, financial institutions, private equity firms and insurance companies.

Structured Finance

Resource America acquisition completed

C-III Capital Partners has finalised its acquisition of Resource America, with the move approved last month (SCI 26 August). Resource America stockholders will be entitled to US$9.78 per share in cash, which equates to a total of around US$207m.

"This is a transformative acquisition for C-III," says Andrew Farkas, chairman and ceo of C-III. "With our expanded platform, we are now able to provide commercial real estate debt and equity solutions to both institutions and retail investors."

C-III's expanded platform now manages in excess of US$13bn in assets and is the named special servicer for US$79bn of commercial mortgage loans. Resource America's common stock ceased trading on NASDAQ effective yesterday.

Structured Finance

Agency hires for Europe push

Kroll Bond Rating Agency has brought in Mauricio Noe as head of Europe, with plans for the US agency to eventually establish a full securitisation rating service on the continent. Noe joins from Themis Investment Management, where he was a director and senior advisor. He has also held senior roles at Deutsche Bank, RBS, ABN Amro and Freshfields.

Structured Finance

Private credit team bolstered

Adams Street Partners has added four hires to its private credit team, building on the launch of the strategy by former Oaktree Capital executives Bill Sacher and Shahab Rashid in January 2016 (SCI 27 January). Frederick Chung, formerly a vp at Goldman Sachs, has been appointed as a principal. Former Morgan Stanley associate Thomas Petty has joined as a senior associate, while Michael Allen and Emily Shiau - previously analysts at JPMorgan Chase and Alvarez & Marsal respectively - have joined the team at the associate level.

Chung will be responsible for all aspects of the investment decision-making process, including sourcing, structuring and reviewing deal opportunities, as well as participating in deal term negotiations. Petty, Allen and Shiau will be responsible for supporting senior members of the private credit team, as well as participating in business due diligence, industry review, document negotiation and portfolio management.

All four new team members will be based out of Adams Street's Manhattan office and report to Sacher and Rashid. "With our deeply experienced team now in place, we will be well-positioned to provide one-stop debt financing to the private equity community and quality credit investments to our clients," comments Sacher, partner and head of private credit at Adams Street.

At Goldman Sachs, Chung was responsible for investing capital out of the firm's various private debt vehicles, including its first BDC. He was also previously a vp with Fifth Street Asset Management, an associate with Greenhill & Co and Golden Arc Capital, and an analyst at Banc of America Securities. He began his career at Lehman Brothers, as an analyst within the credit derivatives team.

Structured Finance

CIFC pair jump ship

MidOcean Partners has hired Spencer Potts and Ruth Lane from CIFC, with the former coming in as head of business development and the latter as head of investor relations. They join following the recent announcement that FAB Group is set to acquire CIFC for approximately US$333m (SCI 23 August).

Prior to joining MidOcean, Potts was head of business development at CIFC. Before that, he was md and head of business development at Silver Creek Capital. He has also been a director in Merrill Lynch's hedge fund origination group.

Meanwhile, Lane served as head of investor relations at CIFC in her previous role. She has also been associate director of investor relations and marketing at Mount Kellett Capital Management, and worked in institutional research sales and equity sales trading for Credit Suisse.

CDS

Citadel makes CDS push

Citadel Securities is launching a European credit derivatives business and has hired Sylvain Lebre to head its operations. The business will begin by trading swaps tied to indices later this year. Lebre previously held senior roles at Barclays, Morgan Stanley and Societe Generale, trading CDS and credit indices.

Insurance-linked securities

ILS start-up names ceo

Samir Shah has been appointed ceo of Ledger Investing, a start-up that seeks to provide a B2B marketplace for insurance risk securitisations. He will work with the company's founders, cto Aymeric Rabot and coo Julien Brissonneau, as they work towards its next stage of growth.

Shah brings to the firm his expertise from his last role at AIG, where he was svp and head of insurance capital markets. He was also previously chief reinsurance officer and chief risk officer prior to that. Shah's other senior roles have been at Validus Holdings, Scottish Re Group and Towers Watson.

Insurance-linked securities

Structured products pro recruited

JLT Re has hired Matthew Carter as a partner in its London market and international division, which is led by Bill Bennett. Carter is tasked with leading all structured and non-traditional reinsurance for the UK and Europe, as well as working with JLT Re's structured products team in North America. He joins from Guy Carpenter, where he was svp for structured products and capital solutions.

RMBS

MBS salesman suspended

Kevin Blaney has agreed to pay a US$30,000 fine and serve a three-month suspension from association with any FINRA members over alleged misleading of customers. The suspension leaves the former Jefferies md and MBS salesman unable to make any contact in the industry until after 5 December.

FINRA's investigations found that Blaney was tied to six transactions at Jefferies, where he either made a false statement or failed to correct a statement by a colleague. In five instances, this involved the misrepresentation of the price of a bond that Jefferies has purchased, which had subsequently attracted the interest of a potential buyer. According to the findings, there were instances in which Blaney was allegedly quoted a price on the bond by its seller, only to provide a different quote to the prospective buyer just minutes later.

The regulatory authority says that each of the six cases it cited represented Blaney violating FINRA Rule 2010. Blaney resigned from Jefferies in August 2014, following the beginning of investigations.

The communications that were reviewed happened between 1 January 2009 and 31 December 2011, and overlapped with former Jefferies RMBS trader Jesse Litvak's tenure at the firm. Litvak was sentenced to two years imprisonment for misleading customers on certain RMBS products, but the ruling has since been overturned by an US appellate court and is set for retrial early next year (SCI 16 December 2015).

ABS

Chinese lease ABS listed

Shanghai Renren Finance Leasing Co has launched Leasing Asset-Backed Securitization Plan II, which will be traded on the Shanghai Stock Exchange. Rated by United Ratings, the RMB510.6m ABS is collateralised by finance leasing contracts for used cars and will be administered by Founder Fubon Asset Management.

The priority class A tranche, which accounts for over 70% of the transaction, has received a triple-A rating. The term of the deal is 21 months.

Morgan Stanley Huaxin Securities served as financial advisor and project coordinator. Deloitte Touche Tohmatsu advised the issuer on internal auditing, accounting, taxation and cashflow analysis. Grandall Law Firm issued a legal opinion for the transaction.

Structured Finance

UCITS fund takes off

Angel Oak Capital Advisors reports that its MontLake Angel Oak Multi-Strategy Income UCITS Fund has surpassed US$150m in assets under management and returned 7.12%, as of 31 August, since its inception on 4 December 2015. The firm says its decision to bring its mortgage and structured credit expertise to the European UCITS marketplace was predicated on years of robust demand for the firm's investment offering in the US.

"The fast growth of the UCITS fund over a short period of time and in a difficult market environment is a strong indication of European investors' interest in gaining exposure to the US non-agency RMBS market," comments Sreeni Prabhu, cio and head portfolio manager at Angel Oak. "We are seeing European institutional investors, wealth managers, family offices and fund of funds clients wanting to diversify away from investment grade corporate credits and government bonds. We believe the fund may offer a better relative value, with potentially more attractive yields and a shorter duration through a concentration of floating-rate securities, making it a unique offering in the European market."

The UCITS fund's asset allocation closely mirrors its US mutual fund, the Angel Oak Multi-Strategy Income Fund. Its current portfolio allocation includes agency and non-agency RMBS, CMBS and CLOs.

Angel Oak selected the MontLake UCITS platform to host its UCITS fund and Bury Street Capital as its marketer. The fund is available in several currencies.

Structured Finance

Canadian SF market 'strong'

The Canadian securitisation market has remained healthy and balanced throughout 2016, according to DBRS. The rating agency maintains its positive outlook for Canadian structured finance despite challenges to the country's economy such as a fall in oil prices.

New issuance in ABS and ABCP from January to end-August has been strong at C$27.0bn, spurred by consumer spending, with 84% of new deals originated so far in 2016 being backed by consumer-related obligations. This has been led by credit card receivables (31%), auto loans and leases (26%), residential mortgages (23%) and HELOCs (5%).

Household credit has been expanding steadily, reaching C$1.94trn as of May 2016, broken down into C$1.39trn in residential mortgages and C$554bn in consumer loans. This has been partly fuelled by increases in home prices, low interest rates and available liquidity.

The use of securitisation by chartered banks to fund credit card receivables remains high, with high credit quality in Canadian credit card portfolios driving investor demand. Year-to-date, the term ABS market has seen nine new deals placed, seven of which have had notes denominated in USD, accounting for 92% of the total amount issued in the deals.

Record auto sales have been the biggest driver behind consumer credit growth. New car sales in 2016 are 4.6% ahead of 2015's record-breaking results, which has led to a C$1.8bn increase in outstanding securitisations back by auto loans and leases during 1H16.

The Canadian government introduced new regulations in February 2016 restricting the funding of insured mortgages through private securitisation vehicles, which came into effect on 1 July. In addition to the amendments, four new programmes were added to the ABCP conduits, including two from new sellers. As a result, the total outstanding amount backed by insured mortgages and insured HELOCs increased to C$10.9bn (33.3% of total ABCP size) from C$8.8bn as of the end of 2015.

Finally, the securitisation sector in Canada is boosted by continued low loss rates in consumer related ABS, with average loss rate for credit card ABS at 3.4% during 1H16, and HELOC loss rates also low at 0.06% for conventional transactions. Loss rates in the auto sector are also low in 2016.

Structured Finance

Green bond scores proposed

S&P is proposing a new product to analyse and estimate the environmental impact of projects or initiatives financed by bonds. Dubbed the Green Bond Evaluation, it would consider both climate change mitigation and adaptation projects.

The Green Bond Evaluation is not a credit rating and would be based on a new green bond evaluation framework and scoring methodology. It would cover projects that aim to mitigate climate change by reducing greenhouse emissions, as well as projects that aim to reduce exposure to, and manage the impact of, natural catastrophes.

It would include at least three scores relating to transparency, governance and a mitigation and/or adaptation score. The proposed approach would then evaluate a bond against each category, with the resulting scores weighted and amalgamated into an overall final Green Bond Evaluation.

Michael Wilkins, head of environmental and climate risk research at S&P, comments: "Our proposed Green Bond Evaluation methodology looks beyond the governance and management of a bond by providing an analysis and estimate of the environmental impact of the projects or initiatives financed by the bond's proceeds over its lifetime relative to a local baseline. This would be in addition to assessing the governance and transparency surrounding the bond."

The proposal has been developed in response to the growing range of green finance instruments designed to increase investment into projects and technologies related to tackling climate change.

Structured Finance

Capital relief trades webinar due

SCI is hosting a complimentary webinar on the current status of capital relief trades. The event is being held at 3pm UK time today (6 September), but will also be available to download from the SCI website afterwards.

Increased pressure on bank capital requirements in the aftermath of the financial crisis has led to a rise in banks seeking to implement capital relief trades. At the same time, new regulations currently before the European Parliament are expected to raise capital requirements for securitisation exposures further. The webinar will explore the implications for capital relief trades, including how regulators are applying significant risk transfer rules in practise and the different drivers from an investor perspective.

Panellists include: Tim Cleary, senior associate at Clifford Chance; Olivier Renault, EMEA head of financial institutions solutions at Citi; and Kaikobad Kakalia, cio at Chorus Capital. To view the webinar, register for a complimentary pass.

For a broader and more in-depth discussion of capital relief trades, SCI and Clifford Chance are hosting a seminar on 15 September in New York. Please email SCI for more details.

Structured Finance

Sukuk issuance remains patchy

Corporate and infrastructure sukuk issuance in the Gulf Cooperation Council (GCC) and Malaysia has continued to stagnate so far this year and may well continue to do so in the following quarters, says S&P. This is despite favourable conditions for more supply, including low interest rates and investor appetite for Islamic assets.

Instead, S&P believes the market has brighter issuance prospects in the medium to long term. "We estimate that Gulf government spending on projects alone - including infrastructure contracts awarded over 2016 to 2019 - could be about US$330bn," says S&P global ratings analyst Karim Nassif.

In the GCC, corporate and infrastructure sukuk issuance totalled an estimated US$2.5bn in the first eight months of 2016, compared with US$2.3bn for the preceding eight months. Issuance is down sharply from US$5bn and US$6.5bn respectively in comparison to the same periods in 2013 and 2014.

Global corporate and infrastructure sukuk issuance was also sluggish over the same period, standing at US$10.8bn compared with US$13.6bn in the first eight months of 2015. Although also showing year-on-year stagnation, Malaysia continues to lead the pack, having issued US$4.5bn of bonds so far this year.

The agency attributes much of the slowdown in corporate and infrastructure sukuk to the current low oil prices, which have affected macroeconomic fundamentals in the GCC. A number of large infrastructure projects have either been cancelled or deferred as part of governments' attempts to control expenditures and address fiscal challenges.

Fewer projects have broadly meant less funding requirements, including in the capital markets. S&P says that weakening bank liquidity and low interest rates might otherwise have encouraged greater reliance on capital markets, including sukuk issuance.

However, S&P says that a number of factors could come into play in spurring greater issuance over the medium to longer term, provided standardisation takes places. Among these are governments and government-related entities needing to diversify funding sources to limit concentration exposure to GCC banks, rising interbank rates and refinancing needs.

CLOs

Retention relief granted

The US SEC last week provided Sancus Capital Management with a no-action letter in connection with an 'applicable margin reset' (AMR) procedure featuring in its proposed forthcoming CLO. The Commission stated that certain AMR procedures, as described by Sancus, would not constitute an "offer and sale of ABS by an issuing entity" within the meaning of Regulation RR (17 CFR Part 246).

A Mayer Brown client memo notes that such AMR procedures include a reverse Dutch auction occurring on certain dates at predetermined intervals after the CLO closing, up to a specified maximum number of AMR dates, such that they would not be applied to any class of CLO securities more than two or three times over its life. The occurrence of an AMR date could also be subject to certain objective conditions precedent, including suggested standard conditions, such as the absence of an EOD under the CLO indenture, economic conditions evidenced by publicly observable economic or market indicators, the CLO trustee having received an opinion of counsel to the effect that the AMR will not cause certain adverse tax consequences or a proposed 'settlement agent' having received confirmation from at least three broker-dealers of their intent to submit bids in the AMR.

The requirement that a description of the AMR procedure be included in the initial offering document for the CLO may not permit existing or legacy CLOs to be supplemented to meet this requirement, according to Mayer Brown. "The limited number of AMR dates and the lack of investor or manager discretion to trigger an AMR may temper enthusiasm for the required AMR procedures. Also, the incoming letter included detailed specific requirements for the related reverse auction -including the involvement of auction and settlement agents, whose fees and expenses would be payable by the related CLO, whether or not the AMR was successful - that may reduce the appeal of the AMR procedures/no-action relief," the memo states.

It concludes: "Notwithstanding such limitations, the no-action relief is the most recent evidence that, for appropriate cases, the SEC is willing to clarify risk retention and related requirements. Given the many risk retention-related questions being raised by CLO market participants, this can only be viewed as a positive development."

CMBS

FRESB loan transferred

The first significant credit issue to hit a FRESB CMBS occurred last month. The US$3.1m Park Place Apartments loan, securitised in FRESB 2016-SB17, became one-month delinquent and transferred to special servicing.

Backed by an Elk City, Oklahoma property built in 1985, the loan was originated by Hunt Mortgage in April 2016, according to Wells Fargo structured product analysts. Per the servicing commentary, the borrower has engaged legal representation specialising in bankruptcy law.

The Wells Fargo analysts note that the loan is one of seven included in the 10-year hybrid ARM loan group.

CMBS

Balloon payoffs spike in August

The percentage of loans that paid off on their balloon date rebounded in August to 68.4%, rising from 55.6% in July, notes Trepp. It is the first monthly increase since March and surpassed the 12-month moving average of 66.5%.

By loan count rather than balance, 72.3% of loans paid off in August. The 12-month rolling average by loan count is 70%.

On that basis, the payoff rate was almost unchanged from July's 72.5%. The July figure of 55.6% of loans by balance was the lowest reading since last December and marked the fourth straight monthly decline.

"The recently falling payoff rate has been a function of the fact that many of the loans now slated to mature are 10-year loans from 2006 that have not been able to be prepaid during their open period. As we continue through 2016 (and later 2017), maturing loans should possess lower credit quality than at origination due to the fact that they were originated later in the 2006/2007 lending boom," says Trepp.

Loans that get to maturity are likely to be weaker performing properties as stronger ones would more likely have prepaid or defeased before reaching their balloon date. The payoff rate may therefore be expected to fall further in coming months.

CMBS

Flooding raises CMBS fears

More than 300 properties backing CMBS loans may be at elevated risk due to major flooding in Louisiana last month, says Morningstar Credit Ratings. There are 302 properties, with an allocated property balance of US$1.1bn, potentially affected.

The properties back 214 loans in CMBS. Almost all are located in the Livingston and East Baton Rouge parishes of the state. While there is potential for physical and monetary damage for many of the properties in these areas, Morningstar notes that undamaged multifamily and hotel properties could actually see an uptick in demand, at least in the short term.

Flood damage has been confirmed to the St Jean Apartments property, which backs a US$27.6m loan in FREMF 2014-KF05. An additional three multifamily properties were shown in flood zones on local government preliminary flood maps, but leasing agents that Morningstar contacted were unable to confirm whether the buildings had experienced flood damage.

By property type, the loans at risk are largely for multifamily properties. There are 52 loans backing multifamily properties, totalling US$710.1m in allocated property balance.

Properties that may not have been damaged by the flooding could still feel the effects of the disaster, with malls for example likely seeing reduced foot traffic. "As a result, we believe that the US$126.9m Mall of Acadiana loan in BACM 2007-2 may suffer from the after-effects of the floods, even though all stores in the mall were open for business at the end of last month," notes the rating agency.

There is also heightened risk for loans that are already operating at low DSCRs, reckons Morningstar. This includes the US$37.9m Bon Carre loan backed by an office property, which has low occupancy and is operating at a 1.06x DSCR, and may struggle to attract tenants.

CMBS

Delinquencies reverse course

The Trepp CMBS delinquency rate reversed course in August and dropped for the first time since February. The US CMBS delinquency rate now stands at 4.68%, a decrease of 8bp from July.

The rate is 77bp lower than the year-ago level and 49bp lower since the beginning of the year. The multi-year low of 4.15% was reached in February 2016 and the all-time high was 10.34% in July 2012.

CMBS loans that were previously delinquent but paid off with a loss or at par totalled over US$1bn last month. Removing these previously distressed assets from the numerator of the delinquency calculation helped move the rate down by 22bp.

A little over US$650m in loans were cured last month, which helped push delinquencies lower by another 13bp. However, almost US$1.25bn in loans became newly delinquent, which put 26bp of upward pressure on the delinquency rate.

If defeased loans were excluded, the overall 30-day delinquency rate would be 4.91%, a decrease of 6bp from July.

Insurance-linked securities

Cat bond issuance declining

Catastrophe bond issuance averaged two deals a month in the 12 months to 30 June 2016, notes Aon Securities in its annual report on the sector. Despite an increase in alternative capital in reinsurance, less is being allocated to cat bonds.

There were 24 cat bonds closed during the period, with a total limit of US$5.2bn, which represents a drop from the US$7bn recorded over the previous 12 months. The reduction is largely attributable to a quiet 1H16, as 2H15 had been relatively flat year-over-year.

The cat bond market continues to be dominated by US exposures, as 18 of the 24 deals comprised US risk in some capacity. On a notional basis, this represented 83% of the period's issuance, compared to 86% in the prior 12 months.

There were three catastrophe bonds covering property risks in Europe and three insurers sought coverage for Japan risks, securing US$720m total limit. In addition, one extreme mortality bond was brought to market, covering Australia, Canada and UK risks.

There were also five quota share sidecars launched, with a capacity totalling US$1.1bn for four of these. The fifth did not disclose its size.

"During the 12-month period under review, we saw a continued increase in alternative capital in the reinsurance sector. However, continuing a recent trend, the capital is being increasingly deployed in the collateralised reinsurance space, rather than in the form of catastrophe bonds, whose overall lower issuance volumes were driven by a number of factors, including competition from traditional markets and longer coverage periods - both of which result in some cedents renewing capacity less frequently and certain cedents increasing their risk retentions," says Paul Schultz, ceo of Aon Securities.

All Aon ILS indices posted positive results over the 12-month period. Aon's all bond and double-B bond indices posted gains of 6.84% and 5.34% respectively. The US hurricane and US earthquake bond indices returned 7.73% and 4.85% respectively.

NPLs

Four more NPL pools sold

Fannie Mae has successfully offloaded another set of non-performing loans, it's seventh sale to date. There were four separate winners for the equivalent number of pools on offer, which accumulated to the total sale of approximately 6,800 loans at US$1.06bn.

Goldman Sachs subsidiary, MTGLQ Investors, was the winning bidder of the first and largest pool, coming to over US$468,000 worth in loans. The other winners were Neuberger Berman's PRMG Acquisition, LSF9 Mortgage Holdings and MFA Financial.

Fannie Mae began marketing these loans to potential bidders on 10 August, in collaboration with Wells Fargo and The William Capital Group. Bids are still due on the GSE's fifth community impact pool on 15 September, which is also part of the offering.

NPLs

Residential NPL sale announced

The US Department of Housing and Urban Development (HUD) has announced another sale of non-performing residential loans as part of its Distressed Asset Stabilisation Program (DASP). On 14 September HUD will offer 20 non-performing residential mortgage pools made up of 10,500 notes with an unpaid principal balance (UPB) of approximately US$1.7bn.

The sale will also consist of 12 Neighbourhood Stabilisation Outcome (NSO) Pools (at around US$800m of UPB) and eight diversified national pools (approximately US$900m of UPB). Additionally, the NSO offerings will include five non-profit or units of local government-only pools.

This sale will include the first-ever national non-profit set-side, with non-profits or local government units able to submit loan level bids on a minimum of 25 loans and up to 5% of the pool's total number of loans in a designated national pool. HUD will then award one sub-pool to the non-profit whose bid delivers the greatest return to HUD. This sub-pool will carry all the same requirements that exist in traditional NSO pools.

Risk Management

China collateral memorandum released

ISDA has published a memorandum on the legal issues surrounding the exchange of collateral with Chinese counterparties. The publication follows the rollout of the Basel Committee's new margin requirements for non-cleared derivatives in a variety of jurisdictions on 1 September.

"This memorandum helps the market to understand the types of security interests recognised in China and analyses enforceability of the commonly used ISDA credit support documents, including title transfer arrangements, under Chinese law," says Keith Noyes, ISDA's Asia-Pacific regional director.

The memorandum is the latest in a series of publications by ISDA that have focused on netting and collateral enforceability in China. It follows the China netting memorandum in 2014, which analysed restrictions under China's enterprise bankruptcy law that may create barriers for close-out netting.

Risk Management

OTC amendment objections raised

The three European Supervisory Authorities (ESAs) - EBA, EIOPA and ESMA - have expressed concerns over the European Commission's proposed amendments to the regulatory standards on risk mitigation techniques for non-centrally cleared OTC derivatives. This includes a rejection of the proposal to remove concentration limits on initial margin for pension schemes.

The ESAs emphasise that these limits are crucial for mitigating potential risks pension funds and their counterparties might be exposed to. They also say that the calculation of the threshold against non-netting jurisdictions should consider both legacy and new contracts.

Further, the ESAs recommend providing clarity that non-centrally cleared derivatives concluded by central counterparties are not covered by this regulation, which has been a source of concern for stakeholders. Clarification is also being sought for the application of the standards to transactions concluded with third-country counterparties.

The ESAs' response suggests that the delayed application to intragroup transactions should also be maintained to allow national authorities to complete the approval process before the obligation will start applying. Finally, they note that the introduction of a number of wording changes proposed by the Commission may lead to a different application of the provisions compared to their original text of the technical standards.

RMBS

Credit unions express CSP concerns

The FHFA's planned Common Securitisation Platform (CSP) might have a negative impact on credit unions, according to The National Association of Federal Credit Unions (NAFCU). In a recent letter to the FHFA, NAFCU counsel Ann Kossachev expresses several concerns about the potential pitfalls of the CSP.

Kossachev comments: "Although FHFA's efforts to create a more efficient platform with an 'open architecture' to support multiple issuer access are commendable, NAFCU and its member credit unions are concerned that the consolidation of securitisation programmes will make it more difficult for credit unions to sell their loans to Fannie [Mae] and Freddie [Mac]."

She also encourages the FHFA to safeguard existing GSE securities held by credit unions, so they do not lose marketability after the introduction of a single security. Despite these concerns, she encourages the FHFA to meet its goal of full fungibility between legacy and new securities and also to ensure a transparent and level playing field that does not just favour big banks.

Kossachev also highlights previous concerns raised by NAFCU about the cost of the CSP and how this might impact the price of loans sold to GSEs.

RMBS

'Less risk' in marketplace RMBS

Additional risks posed to RMBS issued by marketplace lenders (MPLs) will be mitigated by existing regulatory and securitisation frameworks, Moody's says. In a recent comment, the rating agency says it expects future issuance of RMBS from MPLs, but suggests that it will pose less risk than unsecured consumer loan ABS issued by MPLs.

The agency has repeatedly stressed the lack of historical performance data, lack of skin-in-the-game and general untested nature of marketplace lending as a risk factor in marketplace loan ABS. However, it finds that the mortgage industry has such a significant body of regulation and securitisation best practices that many of the risks associated with unsecured consumer marketplace lending will be mitigated.

The agency suggests that mortgage lending laws, regulations and government and institutional supervision provide strong checks on minimum mortgage loan credit quality for new entrants, which marketplace lenders would be subject to. Additionally, RMBS industry practices - such as third-party due diligence - boost transparency and consistency to identify credit problems prior to securitisation, according to the agency. Equally, the RMBS market has an experienced body of securitisation counterparties - including mortgage servicers and trustees and custodians - which will support the quality of RMBS issued by MPLs.

Moody's highlights certain existing laws that will help mitigate such risks. The CFPB's ability-to-repay/qualified mortgage (ATR/QM) rule, for example, will mean that underwriters will be forced to determine that the borrower has the ability to repay the loan, and information used by the underwriter to make such a decision must be verified via third-party documentation. Non-mortgage consumer loans, however, are more susceptible to looser underwriting criteria and unverified borrower information.

Moody's further highlights the TILA-RESPA Integrated Disclosure (TRID) rule regarding disclosures to the borrower, which minimises the likelihood of default. There are a number of other rules specific to the mortgage industry, such as Truth in Lending Act (TILA), the Real Estate Settlement Procedures Act of 1974 (RESPA) and the Home Ownership and Equity Protection Act (HOEPA), which marketplace lending firms originating mortgages and issuing RMBS would have to comply with, further minimising risk.

Additionally, government bodies such as US Department of Housing and Urban Development, the CFPB and state regulators in the states in which they are licensed provide further checks. GSEs also provide further regulatory backstops to minimise risks associated with MPLs.

Furthermore, strong RMBS industry practices will support credit quality, such as pre-securitisation loan due diligence, including reps and warranties that give originators skin in the game. Post-crisis RMBS also use independent third-party review firms to assess pre-securitisation due diligence on the mortgage loans to be securitised, which assesses the quality of the loans from a number of standpoints including credit, property valuation, data integrity and regulatory compliance.

Finally, Moody's comments that it expects MPLs to use the same counterparties that traditional RMBS issuers use that have the knowledge and experience in servicing mortgage loans for new entrants through the business cycle.

RMBS

Mortgage originations spike

US mortgage origination figures hit a three-year high in Q2, with REO and short sales making up 7% of all residential transactions, according to Black Knight. While this is the lowest such share for nine years, it is still twice the normal market level of just over 3%.

The data firm points out that two-thirds of distressed sales in residential mortgages today are REO sales, with the current 27% discount slightly deeper than it was a year ago. The average 21% discount on short sales, however, is declining nationally.

The trend towards deeper REO discounts is possibly due to geographical shifts from areas where discounts are lower to areas where they are steeper. The largest REO discounts over the last six months have been in the northeast and rust belt states. Ohio leads with a 44% average discount on an REO over a traditional sale. The smallest REO discounts were seen in the Southwest.

Black Knight also reports that first-lien mortgage originations in 2Q16 of US$518bn marked the highest volume in a quarter since 2Q13. Likewise, at US$297bn, purchase loan originations saw a 52% seasonal increase from Q1 - their highest level in volume and dollar amount since 2007.

In terms of borrower quality, two-thirds of Q2 purchase lending went to 740-plus credit score borrowers, while the biggest growth was seen in moderate credit borrowers with scores of 700-739. Finally, refinance lending remains below 2015 levels, despite having risen for three consecutive quarters, and despite lower interest rates and a larger population of refinance candidates.

RMBS

Borrower profile lifted

Caliber Home Loans is in the market with its latest non-prime RMBS - the US$216.97m COLT 2016-2. Sterling Bank and Trust originated 15.3% of the pool, improving the borrower credit profile compared to the preceding transaction.

Fitch notes that while the credit quality of the remainder of the pool originated by Caliber in 2016-2 is consistent with the credit quality of the loans in the 2016-1 deal, the loans originated by Sterling have a different borrower credit profile, with higher credit scores, lower loan-to-values and the use of bank statements to document the borrower's income (rather than traditional income documentation). Despite projected loss penalties to reflect the weaker income documentation, the agency anticipates meaningfully lower loan losses on the Sterling loans than for the Caliber loans, due to the relative strength of the remaining loan attributes.

Provisionally rated by DBRS and Fitch, the transaction comprises: US$130.18m A/A rated class A1 notes; US$59.67m BBB/BBB class A2s; US$8.79m class BB/BB M1s; and US$18.33m unrated class M2s. There are also US$130.18m class A3, US$59.67m class A4 and US$8.79m class M1E exchangeable certificates, as well as US$130.18m class A1X, US$59.67m class A2X and US$8.79m class M1X notional certificates.

The notes are supported by a pool of 501 mortgage loans with credit scores (702) similar to legacy Alt-A collateral. However, unlike legacy originations, many of the loans were underwritten to comprehensive Appendix Q documentation standards and 100% due diligence was performed, confirming adherence to the guidelines. The weighted average loan-to-value ratio is roughly 76% and many of the borrowers have significant liquid reserves.

The transaction is collateralised with 53% non-QM mortgages as defined by the ATR rule, while 41% is designated as higher priced QM and the remainder either meets the criteria for Safe Harbor QM or ATR does not apply.

Fitch says it made one change to its loss modelling approach for 2016-2 related to its ATR claim probability. For the 2016-1 deal, the agency doubled its standard ATR claim probability for all non-QM and (HPQM loans in the pool. For 2016-2, it did not double its standard ATR claim probability for non-QM and HPQM borrowers with Appendix Q income documentation, credit scores above 700 and household income above US$100,000.

Consequently, only roughly 20% of the 2016-2 pool received double the standard ATR claim adjustment, while the remaining non-QM and HPQM borrowers received the standard adjustment. Fitch believes this adjustment more appropriately reflects the risk of ATR claims in the pool.

"The combination of the higher credit quality loans from Sterling and a reduced ATR claim probability on a portion of the pool resulted in lower pool loss expectations for 2016-2 relative to 2016-1," the agency notes.