Contents

ABS

Top marks

SLABS extension success exceeds expectations

The final maturity dates on nine FFELP student loan ABS deals were extended earlier this month (SCI 14 September), as the industry continues to get to grips with the recent maturity crisis. Nelnet was able to extend all nine of the trusts that it sought to, largely through making use of DealVector's bondholder communication platform (SCI 22 June).

"It would have been very difficult to extend these nine trusts without a platform such as DealVector to bring bondholders together. When there are so many investors to reach, it makes our job a lot easier to have the platform be able to track them down for you," says Greer McCurley, head of capital markets, Nelnet.

He adds: "Using the platform and going through this process has been very healthy for us and for the wider student loan market. The market had been in turmoil for over a year, so this has been a very important step to find a way to solve the problems it has been facing."

The fact that Nelnet was able to go nine for nine on the extensions has surprised some sections of the market. Even DealVector ceo and founder Mike Manning admits that "no-one was 100% sure that we were going to be able to get all of these trusts extended".

He says: "What really turned it was the combination of a well-developed all-to-all network with the bond and tabulation tools that we have launched, which has made it so much easier to reach bondholders and get votes. By making that easier, we have opened up more opportunities."

A key aspect of the platform's success is that it does not rely on an all-or-nothing approach, whereby every bondholding must be registered. Using Nelnet as an example, Manning estimates that the platform had 85% of positions registered - and notes that this provided the foundation for Nelnet to get 100% of the votes.

Manning adds: "A lot of people assume that the entire system has to change, but it really does not. This is just an overlay that speeds the process up to internet speed; it does not replace all other ways of working."

The affected Nelnet transactions are: NSLT 2010-1; NSLT 2010-2; NSLT 2011-1; NSLT 2014-4; NSLT 2014-5; NSLT 2014-6; NSLT 2015-1; NSLT 2015-2; and NSLT 2015-3. Investor consent to extend NSLT 2012-3, NSLT 2014-2 and NSLT 2014-3 is now also being sought.

"When we have launched tenders in the past it has been very challenging to communicate with all of the bondholders. It is very frustrating because the communication goes through a series of people - perhaps from you to the bank, from one department within the bank to another, from that other department to the investor - so that it becomes a giant game of telephone," says McCurley.

He adds that if the planned extensions are successful for NSLT 2012-3, NSLT 2014-2 and NSLT 2014-3, then more could follow in the future. Manning notes that DealVector, too, is looking to expand its activities.

"We have been approached about consent solicitation in other categories and our service would work for other asset classes. For example, in RMBS there are a number of cases where it would makes sense to call a deal - maybe because the underlying loans become worth more than the bonds they are backing - but the servicers cannot make the call without a vote. Right now that might not be possible, but with a bondholder platform that can bring people together, it becomes possible," he says.

Despite such a positive outcome, the rating cloud over the FFELP student loan ABS sector is unlikely to completely dissipate before year-end, as exemplified by rating actions taken earlier this month by Moody's. JPMorgan ABS analysts highlight downgrades for two particular Nelnet deals, neither of which were among the nine extended trusts, to low investment grade and below investment grade. The NSLT 2008-3 class A4 notes were lowered from Aaa to Baa3, and the NSLT 2008-4 A4 notes from Aaa to Ba1.

For the downgrades on those two bonds, Moody's cited qualitative factors such as Nelnet's ability to call transactions, but the rating agency does not offer any transaction-specific metrics or assumptions. The JPMorgan analysts suggest that maturity stress is not the only consideration.

They note: "Expected losses or failure on any of the other stress scenarios will impact the final rating. Based on our conversation with Moody's analysts, we believe this is also contributing to the investment grade versus non-investment grade differentiation Moody's is making on the two Nelnet bonds. Without additional disclosures from Moody's, it is hard to definitively nail down the exact distinction qualitatively or quantitatively."

The action was among nine downgrades across 12 Nelnet transactions, for which there were also six upgrades. The analysts advocate remaining cautious on FFELP ABS at risk of downgrade.

JL

Secondary markets

Euro ABS/MBS starts slowly

The European ABS/MBS secondary market has started the week slowly.

Softer broader markets meant a dip in activity across ABS/MBS sectors yesterday. However, they remain insulated from the weaker sentiment elsewhere and secondary spreads generally held firm.

In contrast, the previous few sessions saw robust activity boosted by a positive response to comments from the Fed. Decent two-way flows, with a buying bias, were seen throughout ABS/MBS.

High points of activity surrounded peripherals, particularly Italian mezz and seniors; prime autos; and UK non-conforming paper. Consequently, spreads tightened in all three sectors.

There are currently two BWICs on the European ABS/MBS schedule for today. First, at 10:45 London time today there is an 11 line €8.2m original face mixed list comprising: APULM 2008-1 A, BILK 6 A, CLAAB 2011-1 A, FEMO 1 A1, GFUND 2012-2 A2, GIOVC 2011-1 A, LEOFR 2012-1 A, MARCH 4 A, MARCH 6 A1, SUNRI 2015-1 A and SUNRI 2015-2 A.

Seven of the bonds have covered with a price on PriceABS in the past three months, last doing so as follows: BILK 6 A at 100.11 on 29 June; CLAAB 2011-1 A at 99.68 on 20 July; GFUND 2012-2 A2 at 100.085 on 11 August; LEOFR 2012-1 A at 100.406 on 16 August; MARCH 6 A1 at 100.5 on 30 June; SUNRI 2015-1 A at 100.1 on 30 June; and SUNRI 2015-2 A at 100.37 on 1 July.

Then, at 14:00 is a single €200k line of GRIF 1 C, which hasn't traded on PriceABS in the past three months.

Secondary markets

US CLOs limited

The US CLO secondary market is yet to experience the usual post-conference volume boom.

"Everyone's now back from ABS East, but unusually for just after a conference supply is fairly limited," says one trader. "A lot of people are hesitating and still trying to figure out where we're going from here, even though there's seems to be plenty of real money accounts out there with cash to put to work."

Consequently, activity has been conservative so far this week, the trader reports. "Mostly, we're seeing people looking to rotate out of weaker names and into stronger ones, though it's proving increasingly difficult to do the latter at the right spreads."

The trader continues: "Post conference BWICs so far have involved a fair proportion of triple-As and they've come in tighter. However, we've not seen a lot of mezz yet, although there's a handful of double-Bs due today."

Overall, there are currently four BWICs on the US CLO schedule for today so far, but the trader highlights an ABS and Trups CDO list as the highlight of the day. "The mix of first pay CDOs is from a legacy group and it looks like all are intended to trade, so it will attract a lot of interest."

The five line $88+m current face auction is due at 13:00 New York time and comprises: FULT 1A A1A, KDIAK 2007-2A A1, PRETSL 10 A1, PRETSL 11 A1 and PRETSL 13 A1. None of the bonds has covered on PriceABS in the past three months.

Secondary markets

Euro ABS/MBS keeps steady

It continues to be a steady week in the European ABS/MBS secondary market.

The run in to month end continues to be a steady if unspectacular one in terms of volumes on- and off-BWIC. Nevertheless, ever-improving macro sentiment this week and a growing new issue pipeline continue to ensure secondary spreads remain firm across the board.

There are currently three BWICs on the European ABS/MBS schedule for today. The largest is a 12 line 67.09m euro and sterling mix of CMBS and RMBS.

Due at 14;00 London time, the auction comprises: ECLIP 2007-2X C, EHMU 2007-1 B1, ESAIL 2006-1X D1A, ESAIL 2006-3X D1A, ESAIL 2006-3X D1C, ESAIL 2006-4X D1A, ESAIL 2007-1X D1A, LANSD 2 B, PARGN 9X CB, TMAN 5 C, WINDM VII-X D and WINDM X-X D. None of the bonds has covered with a price on PriceABS in the past three months.

Secondary markets

US CLO status quo

The US CLO secondary market is currently little moved by events surrounding it.

"Overall, these are interesting times in the primary CLO and loan markets, but that's not feeding through into the secondary market," says one trader. "Volumes are light at the moment - it's still very much the status quo."

The trader continues: "With the OPEC news hopefully encouraging a more stable oil price; a very active loan market; and the need to get non-retention deals printed before the end of November, it's a positive environment for the new issue CLO market, so we're seeing a lot of deals going through. At the same time, we're also seeing some short-duration players exiting re-set and refi deals and not moving into new bonds. As a result, primary pricing is pushing into the wider end of the range on most deals and there's certainly some actual widening on new double- and triple-Bs."

However, the trader notes secondary spreads have not followed suit. "Secondary is quiet because sellers aren't willing to sell into this market as they feel the fundamentals aren't right and the macro drivers don't' appear to be in their favour. Consequently we're only a touch wider overall, though mid- to lower-tier names are edging out in mezz."

The trader expects the balance in secondary to be maintained for now. "We were in a similar environment a year ago and then everything moved in line with primary, but this time we're looking at maybe $25bn still to be done whereas last year it was nearly three times that. When you add in concerns over rates this year too then the primary influence is likely to be much reduced."

There are three BWICs on the US CLO calendar for today so far. The largest is a six line $20.94m collection of 2.0 double-Bs due at 11:30 New York time.

It consists of: CGMS 2015-2A D, GALXY 2015-20A E, ICG 2016-1A D, OCP 2015-8A D, VOYA 2014-3A D and WELF 2016-1A E. Three of the bonds have covered on PriceABS in the past three months - OCP 2015-8A D at 85H on 20 July; VOYA 2014-3A D at 85.06 on 10 August; and WELF 2016-1A E at LM98H on 27 July.

Structured Finance

SCI Start the Week - 26 September

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

Pipeline
Pipeline activity seemed elevated again last week. There were eight new ABS added, along with six RMBS, a CMBS and four CLOs.

The ABS were: €355.2m Cars Alliance Loans France Master Series 2016-09; US$439m DT Auto Owner Trust 2016-4; €513.6m E-CARAT Compartment 9; £138m Marketplace Originated Consumer Assets 2016-1; US$250m Navistar Financial Dealer Note Master Owner Trust II Series 2016-1; €651m Purple Master Credit Cards Series 2016-1; €930m Red & Black Auto Germany 4; and €541m Voba No.6.

The RMBS were: A$350m Firstmac Mortgage Funding Trust No.4 Series 3-2016; US$395.4m JPMMT 2016-3; US$300m New Residential Mortgage Loan Trust 2016-3; SMHL 2016-1; US$739m STACR 2016-DNA4; and US$649.21m Towd Point Mortgage Trust 2016-4.

US$540m CGCMT 2016-SMPL was the CMBS. The CLOs were US$404m Cathedral Lake IV, CGMSE 2013-2 (refi), US$504.5m THL Credit Wind River 2016-2 CLO and US$600m Voya CLO 2016-3.

Pricings
A few deals also departed the pipeline. As well as three ABS prints there was an RMBS, two CMBS and four CLOs.

€1.075bn Bavarian Sky German Auto Loans 5, C$700m Golden Credit Card Trust 2016-5 and €750m SC Germany Consumer 2016-1 accounted for the ABS. The RMBS was A$750m Progress 2016-1.

US$1.12bn FREMF 2016-K57 and US$1.12bn GSMS 2016-GS3 constituted the CMBS. The CLOs were €471m Dryden 46, US$300m Garrison Funding 2016-2, US$809m Madison Park Funding XXII, US$557.75m OCP CLO 2016-12 and US$407m Regatta VII.

Editor's picks
CDS index rolls provide opportunities: The roll to CDX IG27 may be uneventful in terms of names changes, but Morgan Stanley analysts believe that it does offer investors a good opportunity to move existing longs from cash into synthetic credit, given a sharp compression in the cash-CDS basis. Meanwhile, speculation on the demise of the European single name CDS market were premature, argues Markit, considering the healthy liquidity going into the iTraxx roll...
Reported CLO WAS levels diverging: Deal-reported weighted average spread (WAS) of collateral in European CLOs has been rising, while for US CLOs it has been falling. This has pushed WAS test cushions close to breaching for US CLOs and is expected to impact equity cash distributions...

Deal news
• Renovate America is in the market with its eighth securitisation of PACE bonds. Dubbed HERO Funding 2016-3, the US$320.3m deal is the largest such green bond deal completed to date by any issuer.
• Zopa is in the market with its inaugural rated consumer loan securitisation, which is the first rated securitisation of UK marketplace consumer loans. The £138m deal, Marketplace Originated Consumer Assets 2016-1, is backed by unsecured consumer loans originated via Zopa's marketplace lending platform.
• Fannie Mae has completed two more credit insurance risk transfer (CIRT) transactions - CIRT 2016-7 and CIRT 2016-8 - worth US$14.4bn. The company has now transferred a portion of the credit risk on US$759bn in single-family mortgages, with its latest deals attracting a record number of reinsurers.
• The value of the collateral behind the US$57.5m PNC Corporate Plaza loan - collateralised in WBCMT 2007-C30 - has reduced sharply, notes Trepp. The servicer had previously been posting the securitisation value of US$78.4m, but last month that was reduced to US$37.5m.
• Dock Street Capital Management has been named as replacement collateral administrator to JPMorgan-CIBC 2006-RR1. Under the terms of the appointment, Dock Street will now assume all responsibilities, duties and obligations of the collateral manager under the applicable terms of the collateral administration agreement.
• Moody's has upgraded 15 classes of notes and downgraded 14 classes in securitisations sponsored or administered by Navient. It has also confirmed the ratings of 14 classes of notes. All the ABS - totalling US$7.7bn over 31 securitisations - are backed by FFELP student loans.

Regulatory update
• Final settlements reached by European banks with the US Department of Justice (DoJ) for the issuance and underwriting of RMBS are likely to be far lower than the DoJ's US$14bn opening position in relation to Deutsche Bank (SCI 16 September), says Fitch. Deutsche Bank has already made the point that US peer banks settled for far lower sums than the mooted US$14bn.
• Goldman Sachs is meeting its consumer relief requirements as part of its US$5bn RMBS settlement, says the settlement's monitor. A report from monitor Eric Green shows that Goldman Sachs passed its first round of compliance testing for the consumer relief portion of its settlement, which was reached earlier this year (SCI 12 April).
• Timothy Massad, CFTC chairman, has recommended a one-year extension to the swap dealer de minimis threshold to December 2018. Currently the swap deal de minimis threshold comes into effect in January 2017, whereby the threshold will drop from US$8bn to US$3bn. Massad says that the extension will give the CFTC more time to consider this "critical decision".
• ESMA has published a discussion paper regarding the trading obligation under MiFIR. The trading obligation will move OTC trading in liquid derivatives onto organised venues.

RMBS

STACR liquidity boost

Fitch recently assigned ratings to seven previously unrated notes from seven Freddie Mac STACR RMBS issued between 2013 and 2014, after its similar action last month in respect of seasoned CAS transactions (SCI 31 August). The market is expected to respond favourably to the move, as the newly rated STACR bonds are now eligible to investors that are mandated to purchase rated securities.

Spreads of the newly rated 2014 CAS LCF bonds tightened by 15bp during the week when the action was announced (15 September), compared to flat-to-5bp tighter on the 2015 and 2016 CAS LCF bonds, according to Wells Fargo figures. "In our view, these rating actions should be welcomed by investors, as they provide additional transparency and liquidity to the agencies' credit risk transfer programmes," structured product analysts at the bank note.

The affected classes are: STACR series 2013-DN2 class M2s (rated double-B minus); series 2014-DN2 class M3s, series 2014-DN3 class M3s and series 2014-DN4 class M3s (single-B plus); series 2014-HQ1 class M3s and series 2014-HQ2 class M3s (double-B plus); and series 2014-HQ3 class M3s (double-B). In addition, Fitch assigned ratings to 21 previously unrated exchangeable classes of STACR notes.

The agency had previously only rated the M1 class in STACR 2013-DN2 and both the M1 and M2 classes in the remaining transactions. All of the rated M1 classes have either paid in full or have been upgraded, reflecting strong performance to date.

None of the reference pools has experienced more than 25bp of pre-defined credit events, with half of the deals experiencing credit events of less than 15bp. Using the pre-determined loss severity schedule, none of the transactions have incurred 3bp or more of loss to date.

Since issuance, the M3 classes have also seen a steady increase in their credit enhancement percentage, as the reference pool has paid down. Additionally, the reference pools have benefitted from an average gain in property values of nearly 16%, according to Fitch.

After controlling for WALA and LTV grouping (regular versus high), the collateral quality of the STACR and CAS deals appears quite comparable, according to the Wells Fargo analysts. The STACR notes seem to have a slightly better FICO tail distribution and slightly higher LTV ratio. The later-2014 STACR deals also have a higher percentage of seriously delinquent borrowers.

The analysts point out that the STACR severity schedule begins at 15% for the first 1% of credit events, compared to that of CAS, which begins at 10% severity. As a result, the average cumulative losses seen in the STACR programme are roughly 40% higher than those in CAS for the transactions that they compared.

Due to longer deal age, the newly rated STACR LCF bonds issued in 2H14 have built up more credit enhancement than the rated CAS LCF bonds with similar WALA and WAC. "In our opinion, the higher CE build-up in STACR helps compensate for the higher percentage of seriously delinquent borrowers and, more importantly, the higher loss severities," the analysts observe. "It is also notable that two of the STACR high-LTV LCF bonds - 2014-HQ1 M3 and 2014-HQ3-M3 - have the highest CE out of all the seasoned LCF bonds, at 1.2% and 1.3% respectively. Of all the LCF bonds with at least 1% CE, only one bond - CAS 2015-C02 2M2 - remains unrated."

They suggest that, given the similarly pristine collateral quality but a more adverse loss-to-CE ratio, the more seasoned 2013 and early-2014 STACR LCF bonds warrant a slightly lower rating than CAS LCF bonds of similar vintage.

CS

Liquidity focus

Frank Dos Santos, head of North America business strategy for fixed income pricing at IHS Markit, answers SCI's questions

Q: How and when did your firm become involved in the pricing and valuations business? How has the service evolved in recent years?
A: Markit was founded in 2002 as a pricing service for CDS. From there, the service expanded to include bank loans.

Since 2009 Markit has continued to expand its coverage of fixed income asset classes, now offering evaluated pricing for all types of bonds, including sovereigns, corporates, munis and structured products. We now price over 2.5 million bonds daily and all prices are provided on an intra-day basis.

Q: How do you differentiate yourself from your competitors?
A: I would say there are two crucial factors setting us apart from our competitors: the first is the amount of market data that we have access to. The second is the way in which we collect our data. Approximately 98% of our market data comes directly to us on a feed basis.

This data collection process is supported by providing clients the ability to share market data directly with us. Clients can do this by calling one of our analysts directly or through the price challenge process.

Q: Are there specific areas within structured finance where the firm intends to broaden its scope/coverage?
A: We are a full-service vendor and cover 1.3 million structured finance securities on a daily basis. Therefore, we have the majority of the market covered already. That also includes the 'harder-to-price' areas of the market, such as CDOs.

Q: Which asset class within structured finance do you consider to be most problematic/difficult to value in the current climate and why?
A: Rather than there being a specific asset class that is difficult to value, the main valuation challenges come from a liquidity requirement perspective. As the market becomes more regulatory-focused, our clients increasingly want to see the relevant liquidity inputs. We have most of that information already on the delivery feed and are working on including more of that information as needed.

Q: What challenges and opportunities does the current regulatory environment bring to your business? How do you intend to manage/take advantage of them?
A: The liquidity issue is most pressing here as well. There has been a great deal of focus on money market reform recently and I believe that inherently speaks to the fixed income market. One of our main focuses is therefore on liquidity.

As SEC liquidity requirements change over time, so too must our liquidity product offerings. For example, the SEC's Liquidity Risk Management proposals require that every position must be classified into one of six liquidity buckets, each with a fixed timescale in which the position can be liquidated.

Rather than telling our clients which bucket their position should be placed in, we would prefer to give them enough information to equip them to make their own decision as to which bucket their asset should be placed in.

Q: Away from regulatory matters, what other challenges does the firm consider to be of importance?
A: Issues such as cyber security are certainly something that we consider to be very important and we have a huge amount of dialogue surrounding these challenges with various boards.

But on a more day-to-day level, a lot of our daily interaction surrounds the need for greater transparency in the pricing process. The number one issue for our clients is to understand how and why a particular bond price is calculated.

Increased scrutiny on bond valuations and clients' need to answer to their auditors means that the request for further transparency on prices and insight into the market is higher now than ever. Of particular interest to our clients is transparency into non-agency RMBS, CLOs and CDO prices.

Q: What major developments do you expect/would you like to see from the evaluated pricing industry in the near future?
A: This is a difficult question to answer, but I would highlight that there has been a great deal of flux over the past year in the evaluated pricing community. For example, there has been a merger of two well-known evaluation firms, as well as the acquisition of a major indices group by a data vendor. It is important for us to understand how these changes affect our clients and to make it easy for them to deal with changing market dynamics.

Q: What developments can the industry expect to see from your service in the near future?
A: Given the evolution of our firm over the past six or seven years, the evaluated pricing component is very important to us. We intend to continue building out this part of the business and, given the interest we have had over the past six months, we expect to grow our pricing service in a big way.

We also intend to enhance our liquidity offerings and improve the accessibility of our data through third parties.

AC

Structured Finance

Product development head hired

US Bank has hired James Ferguson to lead global strategies and product development for its securities services division, based in New York. In his new role, Ferguson is tasked with building product and service offerings more broadly - including the bank's European offerings - to deliver a more unified client experience.

Most recently, Ferguson was the executive director and global head of alternative investment services for JPMorgan, where he was responsible for P&L, strategic planning and operating model for clients globally. Prior to that, he served as executive director and coo of global fund services for JPMorgan.

Structured Finance

Portfolio co-investment agreed

Arrow Global Group has acquired an additional specialist servicing capability and entered into a five-year servicing agreement in the Netherlands. As part of the investment, it will also co-invest in a secured loan portfolio with a face value of around €1.7bn (across 9,300 loans).

The transaction sees Arrow Global partner with an existing strategic fund partner, CarVal Investors, to acquire the real estate platform and loan book of RNHB Hypotheekbank (a division of Rabobank subsidiary FGH Bank). Given the quality of the secured loan assets (the average LTV being 66%), the investors will secure non-recourse leveraged finance to part-fund the deal. Arrow Global will acquire a minority interest for a total investment of €25m.

The transaction also include the transfer of a circa 60-strong incumbent servicing team and its servicing platform to Arrow Global's wholly owned Netherlands subsidiary Vesting Finance Servicing. Vesting will act as master servicer and will be responsible for administration of the entire loan portfolio.

The assets are predominantly performing loans for primarily buy-to-let residential and mixed-use properties, with a smaller proportion of CRE assets typically being industrial, retail, leisure or office properties.

CarVal Investors intends to run RNHB as a going concern, continuing to lend to new and existing customers. Arrow Global would benefit from any servicing this generates and also retains the option to participate in these future investments

The transaction is subject to works council advice and the conclusion of financing documents, together with the approval of the Dutch Central Bank.

Structured Finance

Real estate team poached

Sidley Austin has added a trio of partners to its real estate practice in New York. Steven Koppel, Aviva Yakren and Adam Verstandig have both national and global experience advising clients in all aspects of real estate private equity and real estate finance, including capital markets lending, community development finance, low-income housing and new market tax credit products, renewable energy project finance, and high-yield and distressed debt/workouts. All three lawyers were previously partners at Jones Day.

Structured Finance

FI team boosts securitisation expertise

Mizuho has hired Subhathra Pavan to its fixed income sales team to help expand the firm's distribution capabilities in a number of securitised product areas. Pavan will also lead all domestic bank and GSE sales coverage for the US fixed income business.

Pavan brings nearly 25 years of fixed income product experience and prior to Mizuho was md at Deutsche Bank in cross rates sales, covering GSEs and bank portfolios for both rates and mortgages. She has also held senior positions at the Federal Home Loan Bank (FHLB) system, including treasurer of FHLB Dallas and director of term funding for the FHLB Office of Finance.

CDO

Sherwood CDO manager replaced

Dock Street Capital Management has replaced Church Tavern Advisors as collateral manager for Sherwood Funding CDO II. Under the terms of the appointment, Dock Street agrees to assume all the responsibilities, duties and obligations of the collateral manager under an amended and restated portfolio management agreement as well as the applicable terms of the collateral administration agreement.

Moody's has determined that the appointment will not at this time result in the withdrawal, reduction or other adverse action with respect to any current public rating. For other recent CDO manager transfers, see SCI's database.

CMBS

Internalisation agreement inked

RAIT Financial Trust has entered into a definitive agreement to sell its subsidiary Independence Realty Advisors - the external advisor of Independence Realty Trust (IRT) - and certain assets of Jupiter Communities to IRT for US$43m in a transaction to permit IRT to internalise its advisor and property management functions. In addition, RAIT has agreed to sell back to IRT approximately 7.3 million common shares in IRT that RAIT currently owns.

Based on the current market price of IRT's common stock as of 23 September, the total proceeds to RAIT is expected to be approximately US$120m, before fees and expenses. RAIT expects the purchase of its IRT shares to close within one month and the internalisation transaction to close around year-end 2016, subject to customary closing conditions and adjustments, including the successful offering by IRT of at least US$83m of IRT stock.

The transaction is designed to allow RAIT to internally generate capital to support its real estate lending platform, accelerate its opportunistic divestment of real estate ownership positions, simplify its corporate strategy and monetise the value RAIT created through the formation of IRT. The REIT intends to redeploy proceeds into its core activities and take advantage of opportunities to strengthen its market positions and balance sheet.

Effective upon closing of the transaction, current RAIT president Scott Davidson will become its ceo and serve on the board of trustees. Concurrently, RAIT's current ceo and chairman Scott Schaeffer will become the full-time chairman and ceo of IRT. He will serve as a consultant to RAIT for the 12 months following the closing of the transaction to assist with the transition.

The RAIT board intends to elect a new independent chairman to succeed Schaeffer. Meanwhile, James Sebra will continue as cfo until the later of 31 March 2017 or the filing of RAIT's Form 10-K for the fiscal year ending 31 December 2016, after which time it is contemplated that he will become the full-time cfo of IRT.

RAIT's board of trustees formed a special committee made up of independent and disinterested directors to evaluate the transaction.

Insurance-linked securities

ILS duo recruited

AXA Investment Managers has hired Marc Belbenoit-Avich and Robin Chiche to its ILS team. Belbenoit-Avich will join as a senior portfolio manager and Chiche as a quantitative analyst, with both based in Paris, reporting to ILS head Francois Divet.

Belbenoit-Avich was previously at Swiss Re, where he worked for nine years as a property treaty underwriter. He will join AXA IM in October, replacing Benoit Liot.

Chiche joins from AXA Global P&C, where he worked for three years as a P&C reinsurance actuary. He will join in December and replaces Brice Deplante.

Risk Management

ICE replacement named

Hester Serafini, currently coo of ICE Clear US, is set to replace Thomas Hammond as president when he retires on 1 January 2017. Hammond will begin transitioning his ICE Clear US responsibilities to Serafini on 1 October and, beginning on 1 January, will take on new responsibilities advising on global strategic clearing initiatives.

He joined ICE Clear US as president in August 2007 and was previously md of trading operations at the Chicago Board of Trade and evp/coo of the Board of Trade Clearing Corporation. Serafini joined ICE in March 2016 from JPMorgan, where she led the OTC clearing and intermediation business for credit, FX and rates derivatives in EMEA. Prior to that, she was global head of credit prime brokerage and clearing for Deutsche Bank.

RMBS

Ex-RMBS trader suspended

The US SEC has instituted public administrative and cease-and-desist proceedings against Nicholas Bonacci, due to misleading conduct while working as an RMBS trader at Morgan Stanley. He has agreed to pay a civil money penalty of US$100,000 to the general fund of the US Treasury.

The Commission alleges that on certain occasions in 2012, Bonacci misled Morgan Stanley's customers with whom he was negotiating the sale of RMBS about the price at which Morgan Stanley had bought the RMBS and the amount of Morgan Stanley's compensation for arranging the trades. In certain circumstances, Bonacci is also said to have misrepresented that he was arranging a RMBS trade between customers, when he really was selling the RMBS out of Morgan Stanley's own inventory.

Bonacci is suspended from association with any broker, dealer, investment adviser, municipal securities dealer, municipal advisor, transfer agent or NRSRO for 12 months. He is also prohibited from serving as an employee, officer, director, member of an advisory board, investment adviser or depositor of, or principal underwriter for, a registered investment company or principal underwriter for 12 months.

Bonacci was a registered representative associated with Morgan Stanley beginning in July 2007, employed as a trader on various securitised products desks. Morgan Stanley placed Bonacci on administrative leave in March 2014 and he resigned from the bank in February 2016.

RMBS

NCUA suits resolved

RBS has reached a final settlement with the NCUA to resolve two outstanding civil lawsuits for US$1.1bn. The settlements relate to two RMBS cases that assert claims on behalf of US Central Federal Credit Union and Western Corporate Federal Credit Union.

The bank says the settlement amount is substantially covered by existing provisions, as of 30 June 2016, and will have no material impact on its CET1 ratio.

RBS continues to litigate various other RMBS-related civil claims, including those of the FHFA, and to respond to investigations by the civil and criminal divisions of the US Department of Justice and other members of the RMBS Working Group of the Financial Fraud Enforcement Task Force.

ABS

Airbag recall raises loss risk

Auto lease ABS have meaningful exposures to the recall of faulty Takata-manufactured airbags, notes Moody's. Auto loan ABS have only minimal exposure, but the lease sector is particularly affected due to the timing of when the leases backing outstanding transactions will mature, compared with when vehicle fixes occur and replacement parts are available.

"The timing of vehicle fixes versus the sale of turned-in or repossessed vehicles might affect residual realisations in outstanding lease transactions, because the lease maturities in the deals could come due before vehicle fixes are available. The vehicle fixes are subject to manufacturer recall schedules and the availability of replacement parts," notes Moody's.

While some issuers are remarketing vehicles without waiting for replacement parts, others are holding vehicles in their inventory and reporting any residual value gains or losses upon sale once the vehicles are fixed and remarketed. If the availability of the parts is uncertain, an issuer can write off the entire residual value of the vehicles upon lease maturity as a loss. If the parts become available before the legal final maturity of the securitisation, tail-end residual realisations are likely.

Moody's rates US$13.4bn of auto lease ABS, with Volkswagen, BMW and World Omni each having meaningful exposures to recalled vehicles. Auto lease transactions form other issuers have more limited exposure.

Vehicles subject to the Takata recall represent 15% of the remaining securitisation value for Volkswagen Auto Lease Trust 2015-A and 9% of the remaining securitisation value for BMW Lease Trust 2015-1. For the World Omni 2014-A transaction, vehicles subject to the recall represent 10% of the remaining residual value.

Exposures are lower for the BMW Lease Trust 2015-2, BMW Lease Trust 2016-1, World Omni 2015-A and World Omni 2016-A transactions. They stand at 5%, 3%, 5.5% and 6% respectively.

The Volkswagen Auto Lease Trust 2015-A is also affected by a Volkswagen manufacturer stop-sale notification for vehicles equipped with defective airbags or diesel engines that are not compliant with emissions regulations (SCI 9 August). Because of the current lack of replacement airbags for vehicles backing this ABS, Volkswagen chose to write-off the entire residual value of returned vehicles that are subject to the recall upon lease maturity.

Volkswagen Auto Lease Trust 2015-A had a record high 36% residual value loss in July, largely due to the Takata exposure, but also because of vehicles with diesel engines that are not in compliance with emissions regulations. Moody's notes that the monthly residual value loss in August amounted to 19% of the aggregate securitisation value for scheduled terminated vehicles, while the proportion of the securitised residuals in the transaction reached 85% of the remaining securitisation value.

Volkswagen added US$72m to the securitisation's reserve fund last week to mitigate the potential impact of high residual value losses. Moody's believes this amount would be sufficient to cover any losses related to vehicles with faulty airbags and non-compliant engines, and ratings remain unchanged.

ABS

RFC issued on tobacco ABS

Moody's has issued a request for comment on proposed changes to its rating methodology for tobacco settlement revenue securitisations. The proposals take into account an October 2015 settlement between New York state, certain tobacco companies and the pace of arbitration proceedings involving other US states and territories.

The agency highlights that the October 2015 New York settlement resolved the NPM adjustment dispute between New York state and the tobacco manufacturers for the sales years 2004-2014 and defined new calculations for future adjustments to the required annual MSA payments due to New York state. It adds that the arbitration proceedings and subsequent recoveries of the disputed amounts with respect to the states that have not settled their NPM adjustment disputes with the tobacco manufacturers are taking longer than the original expectation of eight to 12 years.

As such, Moody's is proposing to extend its recovery lag assumptions to generally between 15 to 20 years for all states, although these may be adjusted further under certain conditions. Feedback on the RFC is invited by 27 October.

ABS

Reporting service launched

Moody's Analytics has launched Regulatory Reporter, a web-based tool designed to enable auto loan and lease ABS issuers comply with new asset-level reporting regulations under Reg AB 2. The solution generates a transaction report in the XML file format required by the US SEC and automatically reconciles key fields between loan level and pool level data. It also includes workflow capabilities for review, authorisation and archiving to satisfy audit and compliance needs.

Structured Finance

EBA clarifies EU default definition

The EBA has published its final guidelines specifying the application of the definition of default across the EU, as well as its final draft regulatory technical standards (RTS) on the materiality threshold of past due credit obligations. Both the guidelines and RTS will harmonise the definition of default across the EU.

The guidelines clarify all aspects related to the application of the definition of default, including the days past due criterion for default identification, indications of unlikeliness to pay, conditions for the return to non-defaulted status, treatment of the definition of default in external data, application of the default definition in a banking group and specific aspects related to retail exposures.

The RTS specify the conditions for setting the materiality threshold for credit obligations that are past due and harmonise the structure and application of the threshold, which will entail an absolute and a relative component. The levels of the threshold will be set by competent authorities and will be subsequently implemented by all institutions in a given jurisdiction. In the case of a relative component of the threshold, the RTS recommend it should be set at 1%, unless specific reasons are provided.

The implementation of the guidelines and the RTS is expected at the latest by end-2020. Institutions are encouraged to introduce the necessary changes as soon as possible.

CMBS

Quarterly CMBS prepayments up

CMBS prepayments have seen an uptick in 3Q16 due to sustained low interest rates and expectations of a rate rise, according to Fitch. The rating agency suggests that this trend is likely to continue into 4Q16.

Fitch finds that nearly US$18.2bn of loans securitised in legacy conduit transactions between 2006 and 2007 were paid off in 3Q16. Of these, 73% were loan prepayments with 14% having previously defeased.

This compares to prepayment rates of 60% in 1Q16 and 50% in 2Q16, with Fitch expecting increased prepayment activity to continue into 4Q16 when US$15bn is scheduled to mature. It highlights that the majority of prepayments were made during the open period and therefore without penalty (US$12.6bn) while a small remainder required a premium or yield maintenance (US$589m).

Fitch states that the prepayments during the open period included 23 loans, totalling US$6bn that had an outstanding balance of US$100m or more, 15 loans totalling US$1bn, between US$50m-US$100m, 43 loans totalling US$1.5bn, between US$25-US$50m, 134 loans totalling US$2.1bn between US$10-US$25m and 476 loans totalling US$2bn were less than US$10m.

Excluding those loans already defeased, the open period prepayments comprised mostly of office (totalling US$3.4bn), retail (totalling US$2.6bn) and multifamily loans (totalling US$1.7bn).

CMBS

Monthly CMBS payoffs down

While payoff rates for CMBS are up for August to 71.3%, from 62.7% in July, they remain below 72% for the fourth month in a row, according to Morningstar Credit Ratings. In a recent report the rating agency finds that while there was a monthly increase, the year-to-date payoff rate for CMBS declined from 76% to 75.4% last month.

Morningstar expects to see the payoff rate fall to around 70% by the end of the year. It says poor underwriting and falling cashflows may mean legacy loans made between 2006 and 2007 could face difficulty refinancing. Additionally, lower CMBS issuance and tighter underwriting standards for loans on retail properties could exacerbate the issue.

Of the major collateral types, retail and office represented the majority of maturing loans last month with more than 69% of the unpaid balance combined, and neither collateral type posted a payoff rate of more than 70%. While 12.2% of maturing office loans are current, increasing the likelihood of full repayment soon, only 4.1% of the maturing retail loans are current, with 24.1% of these being delinquent.

More than three out of four loans that remain unpaid as of August are backed by office and retail collateral in secondary and tertiary markets, which may be finding it harder to secure takeout financing due to tighter underwriting standards and swift value declines. The agency suggests that underwriting standards have tightened significantly due to rising loss rates on retail loans and so expect retail payoff rates to continue to languish below 70%.

Multifamily continues to perform well with nearly nine of ten loans paying off. However it only represented a small portion of the balance of maturing loans, at 13.6%.

Morningstar also highlights that the volume of maturing CMBS loans has declined for the second consecutive month from US$9bn in June to US$6.19bn in August, just below 2016's monthly average of US$6.46bn. The 2006 vintage represents the majority of maturing loans and has a 72% payoff rate.

Furthermore, the report finds that the balance of CMBS loans scheduled to mature through 2017 continues to shrink, with US$21.16bn scheduled to mature through the end of 2016, followed by US$95.65bn in 2017 for a two-year total of US$116.81bn, down from US$184.79bn at the start of 2016. Morningstar comments that it will remain challenging to refinance many loans scheduled to mature through 2017 because of their lower credit quality, with many of them having unfavourable loan-to-value ratios and debt yields.

The firm adds that it expects refinancing marginal loans to become progressively more difficult because property owners and developers face the potential of higher rates on loans and diminished property values as debt issuance slows and financing costs increase. It concludes that uncertainty around risk retention rules may hamper refinancing borderline 2006 and 2007 loans into CMBS deals. As such it suggests that the payoff rate for 2017 maturities will fall further to around 60%.

CMBS

IPO plans 'positive' for CMBS

Officefirst Immobilien's plans for an IPO on the Frankfurt Stock Exchange before year-end are credit positive for the €468m Taurus 2015-2 DEU CMBS, says Moody's. Officefirst intends to use the proceeds primarily to repay existing debt, but also to convert into a REIT next year.

The IPO and deleveraging plans would lower refinancing risk for the loan securing Taurus 2015-2 DEU. The IPO would increase equity available to the loan sponsor and post-IPO the firm would be better able to raise additional equity if neded.

The Taurus CMBS is backed by the Squaire building at Frankfurt airport. Officefirst's intended conversion to a REIT would improve the refinancing likelihood of the securitised loan, notes Moody's.

The rating agency comments: "In recent years, a number of real estate firms have elected to issue unsecured corporate debt instead of borrowing secured debt. Officefirst will have improved access to the debt capital market post IPO, deleveraging and REIT conversion. Consequently, the likelihood of prepayment of the securitised loan prepayment would increase."

NPLs

Chinese NPL trio prepped

Three Chinese issuers are in the market with NPL securitisations (see SCI pipeline). One of them - China Construction Bank - only made its debut in the asset class last week.

China Construction Bank is joined by China Merchants Bank and the Industrial and Commercial Bank of China (ICBC). China Construction Bank's next offering is sized at CNY1.56bn. The ICBC offering is understood to be sized at over CNY1bn.

The deal from China Merchants Bank will be its third NPL securitisation. Since May, S&P notes that five of the six banks that were granted permission to offer NPL securitisations have done so. Loan collateral has consisted of credit card receivables, residential mortgages and corporate loans.

NPLs

Fifth community impact NPL pool sold

Fannie Mae has successfully sold its fifth community impact pool of NPLs. The winning bidder on the pool was The Community Loan Fund of New Jersey, which is an affiliate of New Jersey Community Capital.

The transaction is expected to close on 22 November and includes 120 loans secured by properties located in the Miami, Florida area with an unpaid principal balance of approximately US$20.3m (average loan size US$169,003).

The cover bid price is 56.6% of unpaid principal balance. This is 52.4% of broker price opinion.

Risk Management

Enhanced clearing regs approved

The US SEC has voted to adopt new rules to establish enhanced standards for the operation and governance of securities clearing agencies that are deemed systemically important or that are involved in complex transactions. It has also voted to apply the enhanced standards established by the new rules to other categories of securities clearing agencies, including all SEC-registered central counterparties.

The new rules apply to SEC-registered securities clearing agencies that have been designated as systemically important by the Financial Stability Oversight Council (FSOC) or that are involved in more complex transactions. Agencies covered by the rules will be subject to new requirements regarding their financial risk management, governance, recovery planning, operations and disclosures to market participants and the public.

The adopted rules will become effective 60 days after publication in the Federal Register. Affected securities clearing agencies must comply with the requirements 120 days after the effective date.

Risk Management

Documentation tool offered

Thomson Reuters and Clifford Chance have paired up to help financial institutions tackle in an efficient manner their regulatory obligations relating to margin rules for uncleared OTC derivatives. Using an innovative approach to contract negotiation, the partnership offers a scalable technology-enabled solution for generating compliant documentation.

Under the agreement, Thomson Reuters will apply its proprietary contract automation software - Contract Express - and abstraction technology built specifically for OTC documentation. With a geographic footprint across 35 offices, Clifford Chance brings its derivatives-related expertise to the partnership, as well as its experience of ISDA documentation initiatives.

RMBS

Indian MBS PTCs surge

The surge in securitisation activity in India last year has continued into 1Q16, boosted by renewed interest in MBS PTCs, according to a report from Crisil. The agency adds that the general securitisation growth is due to clarity on distribution tax and because of banks shifting to quarterly, rather than annual, assessment of priority sector lending targets.

Of total issuance - estimated at R17,000 crore for 1Q16 - MBS made up more than 50%, compared with 42% last fiscal year. The agency adds that MBS PTCs have been a big driver behind this, growing to 44% of securitisation market volume in 1Q16, compared with 35% of total market volume for the whole of last year.

Around one-fifth of MBS was executed through the PTC structure in 1Q16, and Crisil suggests MBS PTCs may be able to attract long-term investors - such as insurers and pension funds - because of their longer tenures and lower delinquencies. Insurers started investing in MBS PTCs in 2013, but lack of clarity on distribution tax brought the practice to an end.

Ajit Velonie, director at CRISIL, comments: "The stage is now set for a return of insurance companies as investors in MBS PTCs. Potentially, pension funds could follow suit, given the tax clarity and the fact that such investments are aligned to their asset-liability management and investment objectives. The investment assets of insurance companies, EPFO and the National Pension System in corporate bonds are estimated at over R6.2 lakh crore. Even a small percentage of this invested in securitised debt instruments would provide a huge fillip to PTC volumes going forward."

RMBS

RMBS downgraded on weak performance

Fitch has downgraded 14 tranches and affirmed 16 tranches across four TDA RMBS and Santander Hipotecario 3. The move reflects the weak performance of the affected transactions.

The underlying pools of the TDA transactions are partially backed by loans originated by Credifimo, a specialised lender targeting mainly non-prime low income borrowers. As of the latest reporting dates, cumulative gross defaults range from 8% (for Santander Hipotecario 3, as of July 2016) to 28.8% (TDA 28, as of June 2016), up from between 7.6% (Santander Hipotecario 3, as of July 2015) and 28% (TDA 28, as of June 2016).

Fitch expects cumulative defaults to continue to rise as further loans roll to default. Indeed, the agency believes that the larger exposure to Credifimo loans in TDA 25 and 28 - at 82% and 37% of the respective current pool balance - suggests that the performance will remain particularly weak, as reflected by its downgrades.

Similarly, the outstanding principal deficiency ledgers (PDL) remain high, at between €23.2m (TDA 24, as of June 2016) and €180m (Santander Hipotecario 3, as of July 2016), compared with €23.4m (TDA 24, as of June 2015) and €186.9m (Santander Hipotecario 3, as of July 2015). As a result, available excess spread and enforcement proceeds are key elements for the repayment of the notes, according to Fitch.

This is reflected in the affirmation of the 16 tranches and the downgrade of the junior notes of TDA 24, TDA 27 and Santander Hipotecario 3, as well as the downward revision of the recovery estimate for TDA 27.

RMBS

Flow-basis deal debuts

Freddie Mac is rolling out a new front-end credit risk transfer offering dubbed Freddie Mac Deep MI CRT. Through a forward credit insurance policy provided by a panel of mortgage insurance company affiliates, this pilot structured transaction provides additional coverage beyond the primary mortgage insurance on 30-year fixed-rate mortgages with 80%-95% LTVs, which is placed immediately upon their sale to Freddie Mac.

Transactions are executed via a competitive, transparent auction process. "Deep MI CRT builds on the success of our Agency Credit Insurance Structure (ACIS) programme and is the first credit risk transfer offering in the market with a flow-basis structure on loans purchased from our diverse lender base," comments Kevin Palmer, svp of credit risk transfer at Freddie Mac.

He adds: "The pricing certainty provided by day one coverage offers us an economically sensible way to transfer mortgage credit risk away from taxpayers. Deep MI CRT embodies all the core elements of our single-family credit risk transfer programme and also helps us expand our important relationships with mortgage insurers."

RMBS

Japan RMBS performance 'strong'

Japanese RMBS performance remained strong in 2Q16 and was unaffected by the Kumamoto earthquake, reports Moody's. Deals rated by the agency continued to exhibit low delinquency and default rates, while the prepayment rate hit a record high.

Moody's-rated Japanese RMBS has limited exposure to mortgages on properties in the Kumamoto prefecture and Kyushu region. Performance is expected to remain stable over the next year, with no performance deterioration expected to come from the Kumamoto earthquakes.

The annualised default rate for RMBS rated by Moody's averaged 0.1% over 2Q16, down from 0.13% in the same quarter in 2015. The annualised 31-60 days past due delinquency ratio was 3.08%, down from 3.12% in 1Q16, while the 61-90 days ratio was 1.74%, from 1.97% in Q1.

The prepayment rate climbed to a record high as there was a surge in mortgage refinancing following the Bank of Japan's (BoJ) adoption of a negative interest rate policy in February. Moody's expects the prepayment rate will remain high for some time, which is a credit positive for most existing Japanese RMBS because it results in the credit enhancement ratio increasing at a faster pace.

The prepayment rate peaked at 17.34% in April, which is the highest level since Moody's records began in 2001. It has since settled back down to around 16%, but this compares with 6.64% in February.

The repurchase rate also rose as there was an increase in the number of mortgages being modified by originators to provide lower interest rates. Securitised loans that are, or are about to be, modified are repurchased by originators in Japan. The repurchase rate is expected to stay in a high range over the next six months, above its 2015 average of around 0.3%.