Contents

Structured Finance

End of the road?

ABSPP volumes down, success of programme questioned

The ECB's ABSPP is entering its third year in November and since inception has been joined by three other asset purchase schemes. While the entire ECB purchase programme is set to expire in May 2017, the effectiveness of the ABSPP in particular continues to be a topic of debate.

ABSPP volumes have been decreasing and, as of August 2016, the ECB's holdings stood at €20.2bn - down €226m from July. In the meantime, holdings in the central bank's other programmes continue to grow, with the Corporate Sector Purchase Programme (CSPP) already at €19.9bn, after growing by €6.7bn from July to August.

The rapid expansion of the CSPP after its launch in June raises questions about whether the ECB is winding down the ABSPP. Simon Collingridge, head of strategic projects at Clayton Euro Risk, isn't overly confident that the ABSPP has achieved what it set out to.

"In terms of its effectiveness, while issuance volumes across Europe are up, it's hard to say it's had a very beneficial impact in many areas," he says.

He adds that in terms of volume, the programme has had a limited impact and that buying secondary paper has also been unhelpful. Equally, the success of the programme in terms of opening up funding has been limited.

Collingridge comments: "Improving access to securitisation funding for SMEs, for example, hasn't really been effective. This is clear when you see that only 4% of ABS issuance currently is SME ABS. There is a legitimate question to be asked about whether anything is helping securitisation as a funding tool for SMEs."

In terms of achieving its stated objectives or meeting market expectations, George Tzigiannis, md at Stormharbour, is more forthright about its shortcomings. "The ECB's purchase programme had good intentions, but it hasn't really worked the way we thought or hoped it would and it has had some unexpected negative consequences," he states.

In theory, the ECB's efforts should have benefited the real economy. Tzigiannis suggests the ECB's money has gone to the wrong places, however.

He explains: "One of the big negatives of the programme is that it has placed money with those that didn't really need it. For example, buying auto ABS from BMW or Dutch RMBS, where issuance is healthy and didn't need the ECB to support it."

From an investor perspective too, this misdirected effort has had a noticeable impact - often negative - where accounts have been forced into uncomfortable buying territory, with fewer good options to choose from. Tzigiannis elaborates: "A key factor too is the withdrawal of high quality collateral, which has had a crowding-out effect and investors have been pushed into competing for riskier positions. This has then led to spread compression and a distortion in the price of risk, with bonds becoming more expensive."

This begs the question of whether the ECB has also come to consider how successful the ABSPP has been, and so is moving towards corporate bonds. Collingridge notes: "Possibly - it certainly has to think about how recirculating secondary issuance isn't a very effective exercise. As a result, it's hard to say it's stimulating the real economy, which may have again prompted a change in direction. Also, realistically, there isn't a huge amount of primary ABS in continental Europe for it to purchase."

While Tzigiannis believes that the move towards corporate bond purchasing isn't linked to concerns about the ABSPP, he agrees that secondary market involvement should have been avoided. He says: "The ECB has been involved in purchasing notes in the secondary market, which really isn't healthy - it's not its place to get involved there. It has led to investors trying to game the system because they can see the goal posts and therefore try to score."

The question then is what the ECB should have done differently and what it can do now to try and rectify the situation or to help achieve what it set out to do. Collingridge believes that while the ECB may have had good intentions, the ABS sector is going to struggle due to the regulatory barriers that have been imposed post-2008.

"Ultimately, it needs to look more carefully at changing the regulatory landscape in Europe in order to boost ABS and the wider economy. The big issue is that of capital treatment - at the moment, this is the real hurdle for the ABS sector," he comments.

Tzigiannis points out, in comparing the ABSPP and the CSPP, that the two sectors are separate to an extent, due to the larger regulatory burdens imposed on ABS in both the US and Europe. The wider issue, he believes, is that the ECB should either have been clearer in its efforts to boost the economy or it shouldn't get involved at all, due to the artificial environment it creates. He indicates that other efforts - such as the TLTRO - might be more successful, however.

He states: "It would have been healthier if the ECB had made real efforts to fund the actual economy by linking more explicitly its purchases to new credit formation and by helping areas that actually need credit. The TLTRO is perhaps a slightly healthier programme, as it provides funding to banks that could then potentially fund the real economy, but still distorts prices in the funding market."

In terms of the ECB now taking a step back, there is a danger that minimising its interventionist approach could cause other problems associated with withdrawing such support. If the central bank does decide to completely end its purchase programme as it is due to in March 2017, it may need a tactful approach.

Tzigiannis concludes: "Really we need to see the central banks take a step back, but then there is a genuine risk of a big shock to the financial system that has grown accustomed to ongoing central bank support. Markets don't like surprises, so you need a gradual withdrawal. Perhaps if they set out a medium to long-term phasing-out plan which was clear to everyone, that might help."

RB

Insurance-linked securities

Weather prediction

JLT's weather ILS the first of many?

The first weather catastrophe bond for 17 years has hit the market. It is hoped that the deal will kick-start an expansion of weather-linked bonds in the ILS market, but their take-up rests on greater education around the topic.

Jardine Lloyd Thompson Capital Markets closed Market Re 2016-5 this month, providing US$30.75m in coverage for extreme European winter temperatures. Allianz Risk Transfer and Horseshoe Group are sponsor and manager respectively on the transaction.

The privately-placed deal was significantly downsized at close from an originally planned structure of more than US$70m in parametric coverage over two tranches. However, it ended up as a one-year single tranche for less than half the figure.

The bond is exposed to the risks of warmer winter temperatures for five weather measurement points across Europe. These locations are: London, Paris, Prague, Frankfurt and De Bilt in the Netherlands. The coupon on the tranche is understood to be 6%.

The introduction of the new peril opens up a variety of opportunities for a market that has been seeking more risk. Barney Schauble, a managing partner of Nephila Capital - an investment manager that has been running a weather fund since 2005 - believes the deal is reflective of a growing and diversifying ILS market.

"The weather-focused aspect has actually been around prior to this century and originally generated out of energy companies looking into how weather fluctuations were affecting their revenue streams," he says. "It never did go away; it just hasn't been arriving in this structured form that the Market Re deal has reintroduced."

He says that the deals similar to these weather-based bonds have instead been active in two other forms. "Historically, there have always been three different types of risk transfers used, the other two being for it to trade on exchanges and, most successfully, on an OTC, more customised basis."

Although the deal marks a significant step forward, it also brings with it a number of tough realities, notably the need to now help more players in the ILS space become accustomed to this type of risk transfer. To date, catastrophe bonds tied to extreme weather scenarios have dominated the ILS market since its beginnings. The approximate amount of notional exposure that trades in the weather market each year is less than US$10bn, according to Nephila.

However, although it is significantly smaller than the catastrophe risk market, Schauble believes the sector has real potential. "The lack of success can be partly accredited to a shortage of awareness on the topic, but weather is a big driver in many industries and the risk is quite large," he says. "Weather fluctuations affect a large number of businesses' revenues, yet you don't hear about retail companies buying insurance cover against rainfall like they would for, say, hurricane events."

An area that the market will continue to rely on as a selling point is the evolution of forecasting technology. Nonetheless, Schauble notes that the advantage of modern forecasting methods is not necessarily in the greater accuracy, but the variety of weather measurement options.

"The advancement of forecasting technology will continue, but the progress has only been around the margins, so far," he says. "The accuracy of forecasting beyond five days is still very limited, for example. But there are new ways and choices for accessing and comparing information, including satellites that will map areas where data is not traditionally available."

Indeed, a number of software companies are looking to make their mark in this space. Speedwell Weather became one of the more recent examples when it released its latest weather derivative pricing and risk management platform in June.

SWS Version provides information from historical forecast archives and access to gridded data services. It is just one of many technological advantages that the space is now adopting.

"The richer data set we now have can be an incentive for more investors to pick up interest on weather-focused products," says Schauble. "But it can also help in better mapping out the risk and giving buyers of protection more to work on when pricing their deals. These types of benefits can help bring more people into the market."

JA

CMBS

Agency investing

Growing agency CMBS market attracts investors

Combined Fannie Mae and Freddie Mac CMBS issuance is expected to come close to US$100bn for the year, with agency CMBS comfortably outstripping non-agency supply. While the agency CMBS market has historically been small, it is growing rapidly and there are attractive opportunities for investors to take advantage of.

"The agency CMBS market has grown a lot over the last few years and there are some good reasons for investors to look at that. In a rising rate environment, the government guarantee is particularly useful because you do not have to worry so much about prepayments, which is one of the reasons that spreads are currently pretty tight," says Ron D'Vari, ceo, NewOak.

US$26bn of Freddie Mac deals and US$21.9bn of Fannie Mae DUS pools were issued in 1H16, putting total issuance 41% higher than in the prior year. Freddie Mac issuance is actually up 83%, with Morgan Stanley CMBS analysts expecting agency CMBS issuance to finish the year at around US$96bn, which is 27% higher than in 2015.

Outstanding agency CMBS volume is around US$300bn, so yearly issuance reaching US$100bn can have a significant impact. However, agency CMBS still has a long way to go to reach the same kind of scale as agency RMBS, which has outstanding volume of more than US$5trn.

Robust demand for rental housing as homeownership rates have declined has helped fuel single-family and multifamily rentals. US homeownership peaked at 69.2% at the end of 2004, but is now at around 63.5%, which is almost a 50-year low.

"From 2009 to 2014, the number of households living in multi-unit rental properties grew by almost 2.5 million, whereas the number of owner-occupied units fell by 850,000. Vacancy rates plummeted, putting upward pressure on rents and spurring demand for multifamily construction," note the Morgan Stanley analysts.

They warn that rents are becoming increasingly unaffordable. Multifamily rent is now approximately 20.8% of median family income, with rent inflation running at 3.8% year-over-year.

"The US housing market has seen a huge shift and homeownership is now a long way down on its peak. The last 10 years have seen a big need for single-family rental and multifamily rental properties. A lot of foreclosed homes were changed into single-family rentals and single-family rental has grown a lot, with both institutional and entrepreneurial investors," says D'Vari.

He adds: "The worry with single-family rentals is that the macro picture could change, people could start buying again instead of renting, and the rental market could collapse. That is one reason why the government guarantee is so useful, because it protects agency CMBS in a way that non-agency is not protected."

While the US government or one of the GSEs will guarantee each agency CMBS deal, thus providing similar credit risk to agency RMBS, the nature of the underlying loans means there is also lower embedded prepayment risk with agency CMBS. There is, however, a relative lack of liquidity when compared to agency RMBS.

"Agency CMBS has a lot in common with agency RMBS. They are in the same mould in terms of negative convexity. There are some big differences in liquidity though," says D'Vari.

He adds: "You can also compare agency CMBS to non-agency. The expectation is that the Fed will continue to raise rates, because it wants to get off the low base and return to a more normal level. That would also help the banks to earn some spread, but it would raise concerns for CMBS investors who are not protected by the government guarantee."

There are also differences among the agency CMBS, of course. The Morgan Stanley analysts believe that agency CMBS as a sector "qualifies as a high-quality asset" and has attractive spreads. They highlight senior tranches of the 10-year Freddie K series currently trading at about swaps plus 81bp as one example.

The FHFA raised its multifamily lending caps for the GSEs earlier this year from US$31bn to US$35bn (SCI 5 May), while also instituting a quarterly review process to make adjustments. The Morgan Stanley analysts believe this may give the FHFA a free option to increase caps during any quarter, although D'Vari notes that the GSEs could also come under pressure to wind operations down.

"Policymakers are not all comfortable with bank balance sheets being too concentrated in multifamily and the FDIC and Fed have been vocal in raising their concerns. That could force Fannie and Freddie to scale things down, which would put the brakes on the market," says D'Vari.

He concludes: "There are also lots of deals which will need to refinance next year. If that need to refi coincides with the market softening, then that could be a problem. We have seen spread widening in non-agency CMBS and if investor demand sags, then the same thing will happen in agency CMBS."

JL

Horizontal interest

Sponsors assess horizontal risk retention benefits

An increasing number of US sponsors are expected to retain a horizontal rather than a vertical risk slice in upcoming securitisations, despite complexities around valuation and disclosure of the residual interests. Several recent transactions have successfully employed the horizontal risk retention method and its economic efficiencies may convince other sponsors to follow suit.

Later this year, all classes of US securitisations will be expected to comply with risk retention requirements set out under Section 941 of the Dodd-Frank Act (SCI passim). Currently, it is just sponsors of deals collateralised by residential mortgage securities that are required to hold 5% of the credit risk of securitised assets.

When deciding on a preference for risk retention, sponsors have various options: holding a vertical interest in the entire capital structure, holding an eligible horizontal residual interest (EHRI) or holding a combination of vertical and EHRI, also known as the L-shaped option.

To date, the majority of sponsors have chosen the vertical option, given its comparative simplicity. However, according to Gilbert Liu, partner at Kramer Levin Naftalis & Frankel, many sponsors have been keen to take the EHRI option, but few have wanted to be the first to do it. "Now that the precedent has been set I would expect that more should follow," he says.

While the vertical retention option can be a relatively straight-forward process, from a deal economics point of view it may not be as efficient. Liu explains that, taking a simple structure of class A (US$70) class B (US$20) and the overcollateralisation/first loss piece (US$10c), the sponsor is required to hold 5% of each class of notes as well as 5% of the overcollateralisation tranche. "This option can result in a lower advance rate for the issuer than it would normally get in a securitisation," he says.

The EHRI option, on the other hand, is more complex but can be better from a deal economics point of view. "In many cases, if a sponsor has typically retained the overcollateralisation/first loss piece, there is no need to change the way a securitisation is done," says Liu.

The EHRI must be equal to at least 5% of the fair value of all the ABS interests that are issued and this must be calculated according to a fair value measurement framework under GAAP. There are also FASB rules to comply with and extensive disclosure requirements for investors.

For example, the sponsor's valuation methodology and the resulting fair value determination must be disclosed to investors prior to pricing. Upon closing, the sponsor must inform investors of its final fair value determinations based on final pricing information and let them know of any material differences in inputs and assumptions.

There are a number of assumptions that go into the fair value measurements. Using Liu's example deal structure above, class A and B would be typically priced at closing and bought at par, so it can be assumed that their fair value is US$70 and US$20.

"The question is the value of the US$10 of overcollateralisation that the issuer will receive over time," says Liu. "All of the assets are run through a model with numerous assumptions including rates of default and prepayment, as well as recovery levels on defaulted assets."

Liu adds: "Once you have determined the cash flow stream that goes to the holder of the residual interest, a discount rate must be applied in order to determine the present value of that residual interest. The sponsor must hold 5% of the sum of the fair value of the notes and the residual interest."

For the most part, sponsors' internal finance teams have been responsible for carrying out the fair value calculations, with some enlisting back-up from the investment bank they are working with. In certain cases it is understood that valuation consultants are also being engaged.

Other than the complexity of the process, there is perhaps another reason as to why so few transactions have been carried out using the EHRI option: deal volume - or lack thereof. Given the relative sluggishness of the US residential market over the past year - and since it is only deals that are backed by residential mortgages that need to comply with risk retention rules - there have been fewer deals and hence fewer instances for the use of EHRI.

The definition of residential mortgage may apply to asset classes other than just RMBS, however. The current rule covers all ABS collateralised by residential mortgages. Timeshare loans, for example, fall under this definition. Of the deals that have used EHRI, a small number have been timeshare ABS. These have provided a good test case for the market.

AC

Secondary markets

Euro secondary unmoved

The European securitisation secondary markets have been unmoved by recent broader market volatility.

Tone continues to be positive across the board and secondary spreads were generally insulated from last week's wider market sell-off. Whereas, boosted by the stronger macro sentiment seen yesterday afternoon widespread tightening looked set to resume at this morning's open.

Shortage of primary supply continues to be the main driver of secondary spreads and while the new issue pipeline is growing once more post-August there are plenty of sectors still underrepresented, notably UK non-conforming and CLOs, meaning secondary demand continues to be encouraged. However, last week's bond and equity sell-off did generate some BWICs and for today at least secondary supply is healthy.

There are currently eight BWICs on the European schedule for today - five ABS/MBS and three CLO. The longest list is a 12 line 65.7m original face Aussie dollar, euro and sterling mix due at 15:00 London time.

The CMBS and RMBS auction consists of: AIREM 2006-1X 2A2, AUBN 4 A2, DUTCH 2013-18 A2, ESTON 2006-1 A2, FLEX 7 A, GRF 2013-2 A, IMT 2006-4H A2, PARGN 8 A2A, PERMM 2011-2X 2A, RESI 2014-1X A2, SAEC 14 A2 and STORM 2013-1 A2. Three of the bonds have covered with a price on PriceABS in the past three months: AUBN 4 A2 at 95.875 on 29 June; DUTCH 2013-18 A2 at 100.99 on 29 June; and FLEX 7 A at 96.25 on 27 June.

Secondary markets

US CLOs keep busy

The US CLO secondary market is continuing to see a healthy amount of lists in the lead up to the ABS East conference next week.

"We're seeing a lot of volume today, which includes a large equity-dominated BWIC," says one trader. "I wouldn't expect everything to trade, but there are some interesting pieces in there that will likely go."

Meanwhile the rest of the lists today present a mixture across the capital stack. "There's effectively something on offer all the way from triple-A down to single-B, whereas tomorrow is so far looking like it will be dominated by mezzanine," the trader says.

The trader also notes that there is an expectation for tightening to slow down this week. "There's been some movement with high yield, so perhaps we'll see some bonds not trade as tight as they may have done over the past week. I'd expect a fair amount of marginals may DNT altogether too. It's going to be interesting to see how this all carries over into next week's conference."

There are 12 BWICs on the US CLO calendar for today so far. The largest of which is the above-mentioned equity list that combines four double-Bs with 17 equity pieces.

Due at 10:00 New York time the $219.506m original face auction understood to be from a London-based seller consists of: ARES 2007-3RA E; BRCHW 2014-1A INC; CDAR 2013-1A SUBA; CGMS 2014-1A INC; CGMS 2014-3A SUB; CLRLK 2006-1A D; DRSLF 2013-26X SUB; EATON 2014-1X INC; GALE 2007-3A E; GALE 2007-3X E; KEUKA 2013-1A SUB; NEUB 2013-14X SUB; OHAPA 2007-1A SUB; SHSQR 2013-1A INC; SHSQR 2013-1A SUB; SHSQR 2013-1X INC; STWRT 2015-1A SUB; VOYA 2014-3A SUB; VOYA 2015-2A SUB; WINDR 2013-2A INC; and WPARK 2015-1A SUB.

Only two of the bonds have covered with a price on PriceABS in the past three months, both on 23 August - ARES 2007-3RA E at 93.21 and GALE 2007-3X E at 95.57.

Secondary markets

Euro CLOs stay active

The European CLO secondary market is continuing to see healthy levels of activity.

"There's been lots of secondary supply over the past week and we've seen some aggressive two-way trading in both 1.0s and 2.0s," says one trader. "However, 2.0 levels are still pretty much unchanged, though double-Bs have moved a little tighter despite the recent weakness in rates and equities."

1.0s on the other hand have moved in across the board, the trader reports. "Notably, sub one-year first pays are now below 50DM and are likely to hold around there - any tighter and negative funding becomes an issue and demand will likely stop any widening."

Meanwhile, the expected flurry of primary issuance is yet to materialise. "There is only one deal, from Pramerica, imminent," the trader says. "It's rumoured to price shortly, but there's been no price talk circulated - presumably it's already oversubscribed and they're just trying to work out levels."

There are three BWICs on today's European CLO schedule so far. The largest of which is an eight line list due at 15:00 London time.

The €41.43m single-A and triple-B auction comprises: ACAEC 2007-1X D, ARESE 2007-2X C, BACCH 2006-2 D, EUROC VI-X D, GROSV III-X D, MERCT III-X B1, RMFE V-X IV and WODST IV-X C. Only EUROC VI-X D has covered with a price on PriceABS in the past three months, last doing so at 98H on 1 September.

In addition, there is a three line ABS CDO OWIC due by 15:00. It involves up to €5m FAB 2005-1 A2; €2.5m FAB 2005-1 B and €2.5m FAB 2005-1 C.

Secondary markets

US CLOs easing up

The US CLO secondary market rally is easing up ahead of next week's ABS East Conference, but activity still remains solid.

"There's been around a 5bp tightening in the last few sessions in the triple-As to single-As, but it's slowed up a little with the Bs," says one trader. "Good names in double-Bs are hitting in and around the low 700s, while weaker names are in the higher 700s with some even in the 800s. Nonetheless, these bonds are still trading well."

At the same time, the trader notes that there are signs of a shift in recent supply and demand patterns. "Interestingly, there are a lot of mezz names that traded in July that are now reappearing. Meanwhile, previously active fast buyers have taken a bit of a back seat for the moment, but there's definitely still some money on the sidelines to be used."

There are six BWICs on the US CLO calendar for today so far. The biggest is a triple- and double-A auction due at 14:00 New York time.

The US$98.15m eight line list comprises: AELIS 2013-IRAR A2A, AMMC 2016-18A AL2, ARES 2013-2A B, CECLO 2013-19A A1A, DRSLF 2014-34A B, LCM 16A B, OCT23 2015-1A B and VOYA 2015-2A B. None of the bonds has covered with a price on PriceABS in the past three months.

Housing boost for Spain

The bottoming-out of house prices in Spain will reduce the expected severity of mortgage defaults, resulting in the improvement of the performance of Spanish RMBS, SME ABS and covered bonds, according to Scope Ratings.

Analysts at the agency suggest that concerns about the near-term volatility of expected recovery rates on defaulted mortgage loans backed by residential properties in Spanish deals are not justified. Furthermore, the current house-pricing trends open the possibility of future rating upgrades at the low end of the rating scale, the rating agency says.

"We are not expecting upgrades in the high end of the capital structure because Scope's triple-A ratings are built with mechanisms to incorporate long-term views on credit performance," says Carlos Terré, analyst at Scope. "Nevertheless, the ratings at the lower end of the capital structure - single-B and non-investment grade - may capture current market conditions. If the trend continues, we could reduce our market value decline assumptions to reflect the lower credit risk of junior tranches in Spanish RMBS transactions and this may result in rating upgrades at this level."

Terré adds that at present it is too early to predict timing of the upgrade process. "As real estate credit is typically mortgage and long-term credit, this is therefore a long-term outlook."

The Spanish residential market is recovering after the severe price corrections that followed the burst of the real estate bubble in the country, according to data provided by the Spanish ministry for development (Ministerio de Fomento) up to end-1Q16. The peak-to-trough correction has been 30.7% on average for the entire market, while current prices have now gained 2.5% from their lowest level in September 2014.

All Spanish regions - except País Vasco - are currently at price levels that show gains with their respective trough values and the gain is larger than 2% for nine out of 17 regions. The regions that are emerging most strongly from the crisis are those with better economic fundamentals (e.g. Madrid) and those where demand is driven by foreign investment, such as the Balearic Islands.

The Balearic Islands show the strongest recovery, with prices 14.1% higher than the bottom level reached in December 2012 or only 15.3% lower than the peak in June 2008. Madrid follows, with prices 7.5% higher than the trough level.

Bottoming-out has consolidated for most Spanish regions, except País Vasco - where house price corrections continue. Scope notes that the recovery is still too fragile to be trusted in regions like Andalucia, Castilla-La Mancha or Murcia, where the price increases before the crisis were the most speculative. Recovery of house prices is protracted in País Vasco because it has also experienced one of the mildest corrections after prices peaked in March 2008 (i.e. 22.25% price decline from the peak), demonstrating one of the most stable house-price environments in the country.

Terré notes that the Basque Country has experienced the softest landing after the real estate crisis. "The price increases were milder and the correction milder," he says. "It could be argued that this is the only region in Spain where there has been a soft landing after the crisis in real estate, and the only region in Spain today where the trough level coincides with current level. This indicates that some of the other regions may have overshot in the correction and now are all back to positive gains after the trough level in the past 18 months."

The outlook for a continued recovery in the Spanish real estate market has improved. "Although Spain is still without a government, the threat from far-left political parties has diminished," says Terré. "Among their policies was a controversial plan for forced rental of property or expropriating property of those with empty homes."

He continues: "Those plans, which could have stopped foreign investment into Spain, were really a threat to the recovery. However, these parties no longer appear to be a viable alternative as a government, so the biggest potential risk to recovery is not as big as it could be."

Issuers have typically chosen to tap the public markets for Spanish covered bonds, while Spanish RMBS and ABS are more likely be retained by the issuer or placed privately. It remains to be seen whether the projected upgrades have a bearing on bond values.

For recent price talk, covers and trade prices on Spanish RMBS, please refer to SCI's PriceABS service.

AC

Structured Finance

SCI Start the Week - 12 September

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

A flood of ABS and CMBS additions swelled the pipeline last week. There were 18 of the former and seven of the latter.

The ABS consisted of: US$250m BCC Funding XIII Series 2016-1; US$769m Capital Auto Receivables Asset Trust 2016-3; US$752m CNH Equipment Trust 2016-C; US$230m First Investors Auto Owner Trust 2016-2; €514.5m Globaldrive Auto Receivables 2016-B; US$1.08bn GM Financial Automobile Leasing Trust 2016-3; US$320m HERO Funding 2016-3; US$1.2bn Hyundai Auto Receivables Trust 2016-B; NZ$200m MTF Torana Trust 2016; US$202.8m Navitas Equipment Receivables Series 2016-1; US$850m Nissan Auto Lease Trust 2016-B; US$362.2m OSCAR US 2016-2; US$203m SoFi Consumer Loan Program 2016-4; US$1.745bn SpringCastle Funding Asset-Backed Notes 2016-A; US$502m TCF Auto Receivables Owner Trust 2016-1; US$150.4m United Auto Credit Securitization Trust 2016-2; US$500m USAA Auto Owner Trust 2016-1; and US$300m Vistana 2016-A.

The CMBS were: CGCMT 2016-P5; US$900m GSMS 2016-GS3; US$900m JPMCC 2016-JP3; US$900m JPMCC 2016-NINE; US$235m JPMCC 2016-WSP; US$280m RAIT 2016-FL6; and C$421.5m REAL-T 2016-2.

Pricings
There would have been even more pipeline additions registered last week were it not for a few swift pricings. At the final count there were six ABS prints, two RMBS and two CLOs.

The ABS were: US$1.1bn Chase Issuance Trust 2016-A7; US$1.5bn Mercedes-Benz Auto Receivables Trust 2016-1; US$209.665m New York Counties Tobacco Trust VI; US$533.9m PHEAA Student Loan Trust 2016-1; US$475.26m Utility Debt Securitization Authority Restructuring Bonds Series 2016-B; and US$941.49m WOART 2016-B.

£321m Dukinfield II and €1.9bn STORM 2016-II were the RMBS. The CLO prints were US$411m Garrison Funding 2016-1 and US$706m Octagon Investment Partners 28.

Markets
The European CLO secondary market continued to tighten last week, as SCI reported on Thursday (SCI 8 September). "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."

The US CLO market has also continued to surge (SCI 8 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."

"[US ABS] spreads are beginning September on the tight side based on a rally shaped by robust demand in Q2 and Q3," say Wells Fargo analysts. They note that most triple-A segments are at or near 2014 tights, with floating credit cards and subprime auto triple-A bonds having around 6bp-10bp left to tighten to reach 2014 lows.

Editor's picks
Prepayment spikes: Investors in US agency credit risk transfer RMBS are taking note of recent STACR prepayment spikes. Robust performance and the re-emergence of a structural nuance have spurred a shift in focus for a sector historically focused on credit risk...
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...

Deal news
• More than 300 properties backing CMBS loans may be at elevated risk due to major flooding in Louisiana last month, says Morningstar Credit Ratings. Flood damage has been confirmed to the St Jean Apartments property, which backs a US$27.6m loan in FREMF 2014-KF05.
• 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.
• 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.
• 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.

Regulatory update
• 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).
• 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.
• 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.

Structured Finance

KBRA makes more moves

Kroll Bond Rating Agency has appointed Ira Powell as chief of staff, following the hire of Mauricio Noe to head its European efforts (SCI 9 September). Powell was previously chief credit officer for KBRA, but now takes on a broader management and operating role. He will continue to report to Jim Nadler, president and coo at KBRA.

Structured Finance

Babson merges firms

Babson has completed the integration of four Massachusetts Mutual Life Insurance affiliates. Babson Capital Management, Cornerstone Real Estate Advisers, Wood Creek Capital Management and Baring Asset Management are now operating as a unified company with over US$275bn AUM under the Barings name.

The combination of the four firms results in a presence in 17 countries. Leadership roles will include Russ Morrison serving as the firm's president and heading global fixed income, equity and multi-asset strategies. In addition, Scott Brown will lead global real estate and Anthony Sciacca will lead global alternative investments and private equity.

The confirmation follows the announcement by Babson earlier this year regarding a planned merger (SCI 11 March).

Structured Finance

ABS expertise enhanced

Capital One has expanded its financial institutions group (FIG) by appointing four senior figures. These include Mahesh Rajagopalan and Dave Donofrio as mds, and Dan Tsacoumangos and Daniel Strong as directors.

Donofrio has assumed the role of a relationship manager for the group. Before joining Capital One, he served as a director of the asset-backed finance division of HSBC. His experience encompasses a broad range of conventional and esoteric asset classes in both the commercial and consumer sectors.

Rajagopalan will lead the structuring and analytics efforts for the various industries and asset classes originated within the FIG. He previously led the structuring team in the securitised products group at Barclays, providing structuring and analytics expertise in consumer and commercial receivables, non-traditional/esoteric assets and RMBS.

Meanwhile, Tsacoumangos most recently served as director within the asset-backed finance group at PNC Capital Markets, where he was responsible for origination, structuring and analysis of structured transactions for financial services clients. Strong was most recently in the US structured credit and solutions group at Natixis.

Rajagopalan, Tsacoumangos and Strong will report to Dave Kucera, md and head of the FIG. Donofrio will report to Kevin Gibbons, md and head of consumer assets relationship management.

Structured Finance

Radian regains SF pro

Peter Danna has returned to Radian for a second stint, serving as svp in structured products. He joins from Morningstar, where he was director of business development, focusing on the agency's ABS client relationships. Prior to that, he was at Radian in his first stretch at the insurer, where he focused on originating, analysing and structuring deals across the structured finance spectrum.

Structured Finance

Carlyle hires credit head

The Carlyle Group has brought in Mark Jenkins for the newly created role of head of global credit in New York, where he will lead the growth of its credit platform. Carlyle's platform includes loans and structured credit, as well as private, energy and distressed credit.

Jenkins, who will also be md and member of each credit fund investment committee at Carlyle, joins from Canada Pension Plan Investment Board (CPPIB). He was senior md and global head of private investments at CPPIB.

Structured Finance

Hire supports new service

Bishopsfield Capital Partners has hired Neil Fitzgerald to support the launch of its new Project Agent service. It is an independent service in response to demands from borrowing and investing clients.

Project Agent will monitor covenant compliance, project progress, manage consents and waivers, and facilitate investor reporting with a focus on infrastructure, real estate and large capital expenditure debt financing.

Iain Barbour of Bishopsfield Capital Partners comments: "Through working in partnership with and listening to our clients, Bishopsfield Capital Partners' Project Agent service will broaden the universe of investors available to invest in complex debt instruments. Borrowers tell us they benefit from a single, experienced creditor representative who understands their underlying business and facilitates ongoing creditor decision-making."

Structured Finance

Online lender secures funding

Online lender InterNex has secured a US$100m funding line from 400 Capital. It will help the lender continue to provide secured SME loans through its online platform, ranging from US$250,000 to US$5m.

Chris Hentemann, managing partner and cio of 400 Capital, says: "We believe this partnership creates great risk-reward attributes and potential for borrowers and investors alike. We look forward to combining 400 Capital's structured finance expertise with a well-pedigreed and experienced team in an underserved market to capitalise on these significant opportunities."

Structured Finance

Fund administrator acquired

Montagu Private Equity is set to acquire the shares of Universal-Investment's current owners Joh Berenberg, Gossler & Co and Bankhaus Lampe. With €280bn assets under administration and 650 employees, Universal-Investment is the largest independent investment company in the German-speaking region and focuses on efficient, risk-oriented administration of funds, securities, alternative investments and real estate.

The firm pioneered master funds and private label funds, and is expected to continue focusing on its core business. Montagu will invest in the further development of Universal-Investment's business model and ensure its continuity by working in partnership with the existing management team.

Following the acquisition of Swiss-based Equatex from UBS Bank in 2015, Universal-Investment represents Montagu's second investment in the financial services sector in the German-speaking region. Montagu currently focuses its Montagu V Fund on differentiated and market-leading companies operating in stable markets, with an enterprise value ranging from approximately €100m to €1bn.

The parties have agreed not to disclose the financial terms and further details of the transaction. The completion is subject to regulatory approval.

Structured Finance

Investment firm bulks up

Global Credit Advisers has hired Shaun Wong as svp in its investment team. He will focus on distressed and special situations investments.

He comes from Credit Suisse where he was a director in the distressed and special situations department. Wong has also worked at Goldman Sachs in trading, fixed income, currency and commodities and as an analyst in the corporate treasury, finance division.

CDO

Third replacement rejected

A third proposed replacement collateral manager has been rejected by Gramercy Real Estate CDO 2007-1 noteholders. Holders of a majority of the CRE CDO's controlling class had previously directed the issuer to appoint Cairn Capital Management North America as successor collateral manager (SCI 10 August). However, the issuer notified the trustee on 9 September that sufficient objections to the appointment of Cairn have been received and the requirements of Section 12(e) of the collateral management agreement relating to the appointment have not been satisfied.

CLOs

Software firm acquires GFS

SS&C Technologies has acquired Wells Fargo Global Fund Services (GFS), adding 250 employees to its business. They will serve over 130 global fund relationships and help build on the administrator's ability to handle complex asset classes.

Both firms hope to benefit from the deal with SS&C gaining from GFS' fund administration expertise, which includes a wide range of complex strategies including structured credit, while GFS will leverage SS&C's technological and software capabilities. The deal is still subject to approvals from relevant regulatory authorities and other customary closing conditions but is expected to close toward the end of 2016.

Chris Kundro, head of GFS, comments: "Joining with SS&C will allow us to dramatically accelerate our global growth plans and pace of innovation. SS&C's innovations in cloud, mobility and fund technology are transforming investment management. This acquisition will create even more value for our customers and will benefit employees as they become part of one of the largest and most reputable fund administrators."

CMBS

CRE investment firm founded

An independent commercial real estate investment management firm has launched, funded by new investors and a management team that has moved from FirstKey Lending. Dubbed Allegiant, it has also inked advisory and consulting agreements with FirstKey over its existing US$215m loan portfolio.

Additionally, Allegiant will deploy up to US$500m for investment in and management of commercial real estate debt opportunities, after entering into an agreement with a financial services firm. Its remit will be to originate, acquire and asset-manage performing, distressed and non-performing mortgage loans, mezzanine loans, B-notes, preferred equity and CMBS securities.

Randy Reiff will act as ceo and cio, having previously been ceo of FirstKey and prior to that head of commercial real estate at Macquarie. The rest of the senior leadership team comprises: Simon Breedon, coo; Ben Milde, head of originations; Mark Lebowitz, head of capital markets; Jeff Wiseman, head of asset management and chief credit officer; John Vavas, head of legal and chief compliance officer; Justin Short, head of whole loan trading; and Brian Mascis, head of CMBS credit.

Insurance-linked securities

ILS firm boosts expertise

Michael Watson has joined Vario Partners in a non-executive capacity. He officially begins at the ILS firm on 1 October 2016.

Watson is known for leading the management buy-out of Canopius, which was then sold to Sompo Japan Nipponkoa Insurance in 2013. He remains chairman of Sompo Canopius and is also a member of the Council of Lloyd's and a board member of the Lloyd's Market Association.

Insurance-linked securities

TigerRisk adds London pro

TigerRisk Capital Markets & Advisory has appointed Leo Beckham as md. He will be based in London and take responsibility for building the business in the UK and Europe, reporting to Tony Ursano, TigerRisk Partners president and TigerRisk Capital Markets & Advisory ceo.

Beckham's appointment becomes effective at the start of November. He joins from Willis Capital Markets & Advisory and he has also worked at Deloitte, Benfield Advisory and Keefe, Bruyette & Woods.

Risk Management

EBRD addition broadens ISDA board

ISDA has appointed Axel van Nederveen, treasurer of the European Bank for Reconstruction and Development (EBRD), to its board of directors. It marks the first time a supranational institution has been appointed to the ISDA board.

ISDA announced earlier this year that it would focus on expanding the composition of its board to provide a broader perspective of derivatives market activity. Senior executives from a central counterparty and a futures commission merchant were added to the board three months ago (SCI 9 June).

Van Nederveen is responsible for all liquidity investments, borrowings and the financial risk management of the EBRD's balance sheet. He has previously worked in fixed income trading roles for BNP Paribas and started his career as a bond salesman at Amro Amsterdam.

"Supranationals play an important role in strengthening economic growth and capital markets activity in both developed and developing markets, and are regular users of derivatives. We are very excited to welcome Axel as our first ever supranational board director, and I am sure his knowledge and experience of derivatives markets will be a huge benefit to both the ISDA board and ISDA's membership," says Eric Litvack, ISDA chairman.

ABS

Green bond grading assigned

Moody's has assigned a green bond assessment (GBA) of GB1 to US$320.24m of HERO Funding 2016-3 class A1 and class A2 notes, marking the first time a PACE securitisation has been assigned such a grading. The green bonds will fund energy efficiency, renewable energy and water conservation improvements on residential properties in California.

The PACE bond issuers are Western Riverside Council of Governments (WRCOG), County of Los Angeles (LAC) and the San Bernardino Associated Governments (SANBAG). Proceeds from the issuance of the class A1 and A2 notes are allocated to eligible project categories, net of administrative fees.

Using internal proprietary modelling that also integrates third-party standards and methodologies, Renovate America - as programme administrator - calculates the financial, economic and environmental impacts resulting from the project improvements that are financed through the HERO programme and funded by the PACE assessments underlying the class A notes. The firm intends to issue an annual report in November that will detail certain additional information regarding the PACE assessments that have been funded, along with their anticipated environmental impacts, and to publish updated annual reports for posting to the ICMA website.

US$256.2m of the note proceeds will be used to refund limited obligation improvement bonds and the remainder will be deposited into a designated prefunding account to be used for the purpose of acquiring additional PACE bonds that are substantially similar in nature, following a 30-day seasoning period. Pending distribution, the segregated proceeds will be invested in highly rated eligible short-term obligations ranging from US Treasury bills to CP. Closing is scheduled to take place by 16 September.

ABS

Armenian ABS debuts

Cardno has provided technical assistance to the US Agency for International Development in connection with Armenia's first-ever securitised bond. The transaction raised US$5m in new funding for five non-bank credit institutions and introduced a new ABS to the Armenian market using a mixed portfolio of microbusiness and consumer loans.

Under USAID's Finance for Economic Development (FED) programme, Cardno introduced the idea to credit institutions and assisted in building the portfolio of loans for securitisation and in amending a law to make the transaction feasible. The aim of the bond is to make more funds available for the development of rural areas - to help farmers expand production and entrepreneurs start businesses in rural villages - and for consumer loans.

In the majority of rural areas in Armenia, non-bank lenders have a larger market share than banks, but they have limits on funding and growth because they are not licensed to take deposits. By securitising a portion of their portfolio, a small group of non-bank lenders were able to raise funds for new lending and demonstrate that capital markets solutions can work in developing countries.

USAID's Development Credit Authority provided a structured guarantee for 50% of the bonds' principal under a risk-sharing arrangement with the credit institutions and investors. The bonds also charted new territory in being multi-currency and the first securitisation publicly listed on the Armenian stock exchange, operated by NASDAQ OMX.

ABS

Nine FFELP deals extended

Nelnet has extended the final maturity date on nine FFELP student loan ABS deals following investor consent. The firm expects to add five-year maturity extensions over the next week on the following transactions: NSLT 2014-4 A1, 2014-4 A2, 2014-4 B, 2011-1 A, 2010-1 A, 2015-3 A3, 2015-3 A2, 2015-3 B, 2015-1 A, 2015-1 B, 2015-2 A2, 2015-2 B, 2014-6 A, 2014-6 B, 2014-5 A, 2014-5 B and 2010-2 A. It anticipates launching a process to seek investor consent to extend its NSLT 2012-3, 2014-2 and 2014-3 transactions in the near future.

Structured Finance

Climate fund adds investor

ASN Bank has invested US$25m in a note issued by the Global Climate Partnership Fund (GCPF). Of the total investment, US$20m will come from the bank's treasury, with foundations advised by the bank providing the remaining US$5m.

Set up in 2009 as a public-private partnership, the GCPF is a structured fund that aims to mitigate climate change through targeted investments in developing countries. While public investors have created the foundation for the fund, the objective is to leverage the share classes held by public entities by raising private funding, notably through the issuance of notes.

ASN Bank, a wholly-owned subsidiary of SNS Bank, is the second private institution to join the ranks of GCPF investors. The first private investment was made in 2012 when a German pension fund acquired a US$30m note. ASN Bank's investment lifts the fund's total invested capital to US$392m.

"With the note issued by GCPF, we have found a highly secured investment opportunity that represents an interesting alternative to other asset classes in the current low interest rate environment," comments Jort Bakker, head of sustainable financing at ASN Bank. "At the same time, and more importantly, it is also an investment aimed at reducing CO2 emissions and fighting climate change - an idea that perfectly fits with the DNA of ASN Bank."

Structured Finance

Chinese issuance gains momentum

China's structured finance market will continue expanding in both scope and scale, with increased asset class diversification, says Fitch. A total of CNY193.4bn of Chinese structured finance transactions were issued in 2Q16, representing a 96% year-over-year increase.

In its latest quarterly publication on Chinese structured finance, the rating agency says the increase in issuance was principally driven by 242% growth in the Asset-Backed Specific Plan scheme. Issuance under the larger Credit Asset Securitisation (CAS) scheme increased 43% year-over-year.

Fitch says the increase was predominately due to RMBS and ABS issuances, although limited by a significant fall in CLO issuance. It expects both RMBS and ABS asset classes to maintain this growth momentum in 2H16.

A raft of NPL ABS are also expected in 2H16. Three NPL ABS and two asset-backed note securitisations have already been issued as the government opens the market up again, having heavily restricted activity in the wake of the financial crisis.

The two asset-backed note deals adopted a special purpose trust structure similar to the CAS scheme, which is the first time the structure has been used for the asset class. The instruments allow non-financial corporates to issue asset-backed notes in China's interbank bond market.

Structured Finance

CRT conference line-up confirmed

Panellists have been confirmed for SCI's Capital Relief Trades Seminar, which is being held tomorrow (15 September) in New York. The event is being hosted by Clifford Chance at its offices at 31 West 52nd Street.

The conference programme consists of a series of panel debates focusing on issues affecting capital relief trades. The sessions comprise the regulatory backdrop, originators and issuers, structuring considerations, investor issues and pricing and valuation.

Speakers include representatives from: Arrowpoint Partners; Assured Guaranty; BNP Paribas; Chorus Capital Management; Citi; Elanus Capital; Fairwater Capital; JC Flowers; Lloyds; Mariner Investment Group; Nomura; Sandler O'Neill + Partners; and the SEC. Please email for a conference registration code or click here and follow the link to register.

Structured Finance

Tikehau closes direct lending fund

Tikehau IM has closed its Tikehau Direct Lending III fund at €610m. This "new generation of direct lending fund" will provide private debt financing to companies based in Europe.

Over 40% of the fund is already invested through 15 portfolio companies based in France, Spain and Norway. The investor base mainly consists of insurance companies, pension funds, private banks and family offices based in France, Spain, Italy, Belgium, Finland, Hong Kong and Canada.

The fund is incorporated in Luxembourg and offers a diversified portfolio of private debt solutions. It targets companies valued between €50m and €500m.

"This new generation of fund is larger than our previous vintages and has attracted top-tier investors. This is a recognition of the private debt team's expertise and its ability to anticipate the needs from both portfolio companies and investors. In a context of growing banking disintermediation, we are convinced that private debt is an attractive and long-lasting solution adapted to the profound changes of the financing markets," says Tikehau Capital co-founder Antoine Flamarion.

CDS

Single-name CDS supported

A new academic literature review commissioned by ISDA shows that single-name credit default swaps remain an efficient tool for hedging credit risk and can have a positive impact on the economy. Written by Christopher Culp and Andria van der Merwe - both research fellows at the Johns Hopkins Institute for Applied Economics, Global Health and the Study of Business Enterprise - in collaboration with Risk Management Consulting Services consultant Bettina Stärkle, the paper summarises the empirical analyses from more than 260 published academic articles and working papers on the benefits and costs of single-name CDS.

The review shows that the single-name CDS market has a positive impact on the supply of credit to many reference entities underlying traded CDS, suggesting that the ability of lenders to hedge their credit exposures can make them more willing to extend credit. The paper cites research that finds banks make larger and longer-dated loans to CDS reference entities.

The empirical evidence also suggests that the availability of single-name CDS often results in lower borrowing costs for some corporate and sovereign reference entities, especially those that are lower risk and more transparent. Another key finding is that single-name CDS provide useful information about the likelihood of future adverse credit events, including rating agency downgrades and defaults. This information is often available well before it is apparent in bond and sometimes equity markets.

The paper also explores common criticisms of the single-name CDS market, including the claim that the instrument was a causal factor in the eurozone sovereign debt crisis from 2010. The literature review finds little evidence to support this, with most research instead indicating that CDS spreads reflected underlying fiscal problems in the single currency system and global macroeconomic risk factors.

While the literature review suggests single-name CDS are a source of interconnectivity in the financial system, the empirical evidence does not support the claim that these products are a fundamental cause of market stress.

CLOs

CLO UCITS fund debuts

Fair Oaks Capital has launched the first UCITS fund to offer global access to senior secured corporate loans through investments in CLOs. The Fair Oaks Dynamic Credit Fund is actively managed, with a strong emphasis on bottom-up fundamental credit analysis.

The fund primarily seeks exposure to investment grade rated CLO securities on a long-only basis, with no leverage used at fund level. It targets 5% per annum net returns and offers weekly liquidity, with daily pricing.

The vehicle is a Luxembourg SICAV structured using the Alpha UCITS platform. The initial share class is expected to close on 28 September at around €150m.

CMBS

Euro CMBS delinquencies rise

At the end of August 2016, the European CMBS 12-month rolling loan maturity default rate rose to 24.4% from 11.9%, according to S&P. The delinquency rate on continental European senior loans increased to 63.9% from 59.6%. In the UK it rose to 25.4% from 21.8%, meaning the total senior loan delinquency rate for Europe increased to 50% from 46.1%.

CMBS

Canadian CMBS outlook 'positive'

DBRS maintains a positive outlook for Canadian CMBS as the market continues a period of elevated refinance activity brought on by the maturity of the 10-year CMBS bonds from the 2005-2007 vintages. Despite the positive outlook, the rating agency notes there are several potential risks, such as the weaker economic environment in Canada and the contraction in the jobs market caused by low oil prices.

Persistently low oil prices are especially concerning for the province of Alberta, where the energy sector's downturn has had a particularly marked impact on commercial real estate performance. DBRS notes that these considerations pose legitimate transaction-specific concerns, and while mitigated by the strong historical performance of Canadian CMBS, they represent the first time in Canadian CMBS history that the sector has faced broadly systemic adverse pressure.

There have been two new losses reported since DBRS's last Canadian market outlook a year ago, with both reporting low loss severities. Around C$2.77bn of Canadian CMBS is scheduled to mature over the next 18 months, with vintages prior to 2009 representing 87% of these loans and five loans in CMBS 2.0 deals representing the remainder. The overall outlook for these maturities is positive.

New issuance is expected to be intermittent, despite the large pool of near-term maturities. As at the mid-point of 2016, there had only been one transaction issued as a result of bond price volatility in the CMBS new issue market, but improvement in lender and investor appetites thus far in the second half of the year is expected to result in additional issuance by the end of 2016 and into early 2017.

CMBS

CMBS 1.0 late-pays rising

Fitch reports that US CMBS delinquencies fell last month for the first time since March, even though late-pays on older vintages continue to rise. Delinquencies declined by 5bp in August to 3.15% from 3.20% a month earlier.

Portfolio run-off of US$8.1bn outweighed new issuance volume of US$4bn from six transactions in July, causing a decrease in the overall index denominator. Resolutions of US$630m exceeded new delinquencies of US$339m, but both figures were well below their monthly year-to-date averages of US$801m and US$710m respectively. While the overall delinquency rate has declined, CMBS 1.0 delinquencies have risen since the start of 2016 and were up for the seventh consecutive month, now nearing 11%.

Over 50% of the outstanding CMBS 1.0 delinquencies are REO assets, with an average aging of approximately 23 months. By property type: 43% of outstanding CMBS 1.0 REO assets by balance are retail properties; 32% are office; 10% are hotel; 6% are multifamily; 4% are industrial; 3% are mixed use; and 2% are other asset types.

Contributing to the majority of the 45bp decline in the hotel delinquency rate, the largest resolution was the JQH Hotel Portfolio loan, which consists of a US$127.9m A-note (securitised in JPMCC 2006-LDP7) and an US$8.4m B-note (CD 2007-CD4). The borrower filed for bankruptcy at the end of June, but an interim cash collateral court order provides for the continuation of monthly payments to the lender (see SCI's CMBS loan events database).

Last month's largest new delinquency was the US$113.7m SBC-Hoffman Estates loan (US$55.7m securitised in BSCMS 2006-PWR11 and US$58m in MSCI 2006-TOP21). The borrower is cooperating with foreclosure and the appointment of a receiver.

Current and previous delinquency rates by property type are: 4.79% for retail (from 4.73% in July); 4.55% for office (from 4.56%); 3.85% for hotel (from 4.30%); 0.79% for multifamily (from 0.86%); 4.05% for industrial (from 3.98%); 4.01% for mixed use (from 4.03%); and 0.72% for other (from 0.76%).

Insurance-linked securities

UK ILS bill set for 2017

The London Market Group (LMG) has welcomed a letter from HM Treasury that outlines early 2017 as the target for implementing an ILS framework within the UK. The letter, signed by Economic Secretary to the Treasury Simon Kirby, notes that the next phase involves drafting the regulations for consultation later this Autumn prior to putting legislation before Parliament.

Nicolas Aubert, chairman of the LMG, says: "We are heartened to hear that the ILS project remains a priority for the Treasury and we very much look forward to working with them to ensure successful implementation of the UK's new ILS framework as soon as possible in 2017."

The process for implementing an ILS framework in the UK began late last year with the LMG's establishment of an industry taskforce (SCI 9 June 2015). The LMG has also been active with the launch of a white paper this summer that seeks an ILS solution for catastrophes in under-insured markets (SCI 14 July).

NPLs

NPL portfolio on the block

Freddie Mac is auctioning off a US$1.1bn portfolio of seasoned non-performing residential whole loans held in its mortgage investment portfolio. The NPLs are currently serviced by Wells Fargo or Ditech Financial.

The NPLs are being marketed via five pools: four standard pool offerings (SPO) and one extended timeline pool offering (EXPO). Bids are due from qualified bidders on 29 September for the SPO offerings and 13 October for the EXPO offering. The sales are expected to settle in December.

The winning bidder will be determined on the basis of economics, subject to meeting Freddie Mac's internal reserve levels. Advisors to Freddie Mac on the transaction are Wells Fargo and First Financial Network.

Risk Management

ISDA calls for standardisation

There are many opportunities for greater standardisation and automation of derivatives trade processes in order to achieve improved efficiency, reduced complexity and lower costs for market participants, says ISDA in a new white paper. The association notes that market participants are increasingly looking for market solutions to automate and streamline the reporting, trading, clearing and collateral management requirements required by regulatory changes.

ISDA highlights a number of challenges with existing structures and processes and makes several recommendations, not least embracing further standardisation - particularly in documentation, data and processes. To this end, ISDA is working with stakeholders to develop a common view of an efficient market infrastructure and associated processes, which will enable the design of effective solutions.

ISDA will also work with its members to explore opportunities to leverage advances in technology, as well as facilitate collaboration and communication between market participants.

"The derivatives industry has become reliant on legacy infrastructures and processes that have been layered on top of each other over time. That might be the result of historical acquisitions, where the respective systems have not been fully integrated. More recently, the sheer pace of regulatory change has meant firms have been under pressure to tackle the next pressing deadline. The result is a derivatives infrastructure that is duplicative and based on incompatible operating standards, and this is not sustainable," says ISDA ceo Scott O'Malia.

The paper also identifies opportunities to transform ISDA's legal documentation by developing 'smart contracts' that can automatically execute intended lifecycle events. The whitepaper further recommends the adoption of a standard, multi-use derivatives product identifier as a key requirement for reducing duplication and inconsistency.

RMBS

Ocwen steps up loan mods

Ocwen's loan modification activity has doubled beginning in July with the implementation of the Streamline HAMP programme. Modification activity is expected to remain elevated for several months as a result of the programme.

Increased cash flow from the successful modifications is expected to outweigh the costs of unsuccessful modifications, says Ocwen. Fitch notes that unsuccessful modifications will have longer liquidation resolution timelines and likely higher loss severities than they would have had outside of the programme.

The Streamline HAMP programme targets borrowers who meet basic HAMP eligibility criteria and, among others, those who have not completed a HAMP application by the time their loan is 90 days delinquent. The recent spike in modifications is the result of converting borrowers to permanent modification status that were solicited for the Streamline HAMP programme beginning in January and have now successfully completed the three-month trial period.

RMBS

Brazil RMBS RFC issued

Moody's has published a request for comment on its proposed approach to Brazilian RMBS, to be submitted no later than 17 October 2016. The approach uses an RMBS collateral analysis model called Moody's Individual Loan Analysis (MILAN) which is a key component in its loan and portfolio loan evaluation.

It states that in determining Brazil MILAN it used parameters for non-recourse new securitisation market (NSM) settings. The calibration of Brazil MILAN was also driven by benchmarking Brazilian RMBS to Mexico and Russia.

However, some adjustments were made to the non-recourse NSM setting for Brazil due to differences among Brazil and other new markets in terms of macroeconomic factors, market information regarding legal processes for foreclose and interest rate levels in Brazil relative to the average for non-recourse NSMs.

The rating agency highlights that the proposed approach does not include any changes to previously published methodologies or settings and does not affect any outstanding transactions. As such, no rating changes will result from the publication of the Brazilian MILAN settings if the proposal is adopted.

RMBS

DB enters RMBS settlement talks

Deutsche Bank has commenced negotiations with the US Department of Justice (DoJ) to settle civil claims which may be brought as a result of the bank's issuance and underwriting of RMBS and related securitisation activities between 2005 and 2007. The bank confirms that the DoJ's opening position is a US$14bn settlement, with Deutsche Bank invited to submit a counter proposal. The bank says it "has no intent to settle these potential civil claims anywhere near the number cited".

RMBS

Canadian RMBS transferred

Equitable Bank has entered into an agreement with Canada Mortgage and Housing Corporation (CMHC) to become the successor issuer on C$3.1bn of outstanding National Housing Act (NHA) MBS pools originally issued by Maple Bank's Toronto branch and bought by third-party investors. The move follows Maple's Chapter 15 bankruptcy filing in February after Germany's BaFin initiated a tax probe into the lender.

As the successor issuer, Equitable will assume Maple Bank's payment and other responsibilities related to the MBS pools and in exchange will receive the excess interest spread generated. This excess interest spread, net of servicing costs and purchase price amortisation, is expected to be accretive to Equitable's earnings per share in 2016-2020.

The transaction will be financed through Equitable's existing sources of liquidity. "This transaction is an excellent use of cash in that it delivers earnings accretion immediately and over time, without diminishing the bank's strong capital ratios that support our ongoing asset growth," comments Andrew Moor, president and ceo of Equitable. "Strategically, it meets our key requirement of creating meaningful shareholder value and the risk assumed is low and well mitigated."

Equitable was also the successful bidder in a marketing process previously approved by the Ontario Superior Court of Justice that was administered by KPMG, in its capacity as the Court-appointed liquidator of Maple Bank's Toronto branch. This will see it acquire C$113m of unsold MBS (subject to adjustment in certain circumstances) and a C$33m credit facility secured by residential mortgages - both of which are collateralised by insured residential mortgages.

Both of the transactions are subject to approval of the Court, which is expected to occur by end-3Q16, and customary closing conditions.

RMBS

Second SFR deal repaid

American Homes 4 Rent (AH4R) has repaid the US$342.1m loan that backs the American Residential Properties 2014-SFR1 single-family rental securitisation. The move follows the merger of the sponsor American Residential Properties with AH4R earlier this year.

Unlike other single-family rental transactions, ARP 2014-SFR1 had to satisfy a specific debt yield in order to extend its loan terms (SCI 15 April). However, the servicer confirmed that the trustee received the full loan repayment proceeds on the maturity date.

KBRA notes that its ratings for the transaction will be withdrawn once the payment is reflected in the September trustee remittance report and certificateholders have received the full amount of distributions to which they are entitled.

RMBS

Ocwen fails two tests

Ocwen failed two compliance tests in 4Q15 due to force-placed insurance, according to the latest US National Mortgage Settlement monitor review by Joseph Smith. The failures came after the servicer had passed all tests in the previous quarter.

Smith says that Ocwen failed metrics 28 and 29, the former of which tests the timeliness of communications regarding a lapse in homeowner's insurance coverage and that force-placed insurance can be purchased. The latter tests whether Ocwen terminated force-placed insurance and refunded premiums to affected borrowers in a timely manner.

In addition, Smith says that he gave the green light to Ocwen over foreclosure sales on 17,300 loans after originally putting a hold on this operation back in March. The foreclosures had been paused due to 'significant errors' in loan modification denial notices sent to borrowers.

However, after Ocwen mailed corrected notices to affected borrowers in May and provided a sufficient timeframe for borrowers to appeal their denials, Smith permitted Ocwen to lift the hold in July. Ocwen is continuing to address and implement other remediation efforts related to this failure.

RMBS

STACR hits tightest price

Freddie Mac has priced its sixth STACR offering of the year, with the senior M1 notes printing at the tightest level to date at one-month Libor plus 80bp. The US$515m STACR Series 2016-HQA3 also saw its M2 tranche print at plus 135bp, the M3s at 385bp and subordinate Bs at 900bp.

Fitch provisionally rated the US$143m M1 tranche at triple-B, while the M2s (US$148.5m) were assigned a triple-B minus rating and the M3s (US$203.5m) single-B plus. The B tranche (US$20m) is unrated.

The 30-year fixed rate single family mortgages referenced in the deal have LTVs ranging from 80% to 95%. Freddie Mac holds the senior loss risk in the capital structure and a portion of the risk in the M1s, M2s and M3s, as well as the first-loss B tranche.

Bank of America Merrill Lynch and Goldman Sachs were co-lead managers and joint bookrunners on the risk-transfer RMBS.