Contents

Secondary markets

Euro secondary patterns persist

Trading patterns in the European securitisation secondary market seen towards the end of last week are continuing into this.

The primary market remains the main focus, but flurries of BWICs continue to bolster secondary activity. A few DNTs aside, line items in all sectors and parts of the capital structure continue to trade well. Despite some skittishness in broader markets secondary spreads are holding firm across the board.

There are currently six BWICs on the European schedule for today. Most line items are of reasonably small size, but there is a £15m piece DBSSY 1A A due at 14:00 London time. The senior CMBS tranche has not traded on PriceABS in the past three months.

Secondary markets

US CLOs stay firm

The US CLO secondary market is staying firm despite strong primary activity.

"The market is holding up pretty well in the face heavy new issuance," says one trader. "Some are saying they expect new issuance to eventually win out and push spreads wider, but we've certainly not seen that yet with volumes being absorbed reasonably well."

The trader continues: "The ambitious issuance schedule has inevitably taken focus away from secondary and we're not seeing as many BWICs as went through during the summer. However, secondary spreads aren't moving much, though costlier names have begun to bifurcate."

The primary market is likely to continue to draw attention away from secondary over the next month or so, the trader suggests. "There are two forces behind the new deal volumes - the big managers who are used to issuing four or more deals a year are behind because the market was pretty much shut in Q1 and are now looking to catch up; and at the same time there's a lot of re-set activity that people are trying to get done before the risk retention rules come in."

There are currently seven BWICs on the US CLO calendar. The largest is a 15 line double-A list due at 14:00 New York time.

The list consists of: AMMC 2016-18A B, AMMC 2013-12A B, ARES 2015-2A B, BOWPK 2014-1A B1, CGMS 2013-1A A2A, CGMS 2013-2A B, CEDF 2016-5A B1, HLM 9A-2016 A2, HLM 8A-2016 B, OCT12 2012-1A B2R, OCT25 2015-1A B, VOYA 2014-3A A2A, VOYA 2015-3A A2, VOYA 2015-1A A2 and VOYA 2016-1A A2A. Only CGMS 2013-2A B has covered on PriceABS in the past three months - at 99.99 on 6 October.

Secondary markets

Euro secondary unmoved

The European securitisation secondary market remains unmoved by continuing strong new issue volumes.

The primary market is still attracting the majority of focus, but secondary continues to tick over with pockets of trading throughout euro and sterling ABS, CLOs and MBS. An overall slight buying bias is ensuring that tone remains positive and secondary spreads are unchanged across the board in the past couple of sessions.

There is currently one European BWIC on the schedule for today. Due at 14:30 London time it involves eight double- and triple-B CLOs.

Totalling €24.755m original face the list consists of: AXIUS 2007-1X E, EGLXY 2013-3X D2, HARBM PR²X B2, JUBIL 2013-10X D, JUBIL 2013-10X E, MERCT III-A B1, MERCT III-X B1 and QNST 2007-1X E. Only MERCT III-X B1 has covered with a price on PriceABS in the past three months - 99.61 on 15 September.

Secondary markets

US CLO supply spike

There is a spike in supply in the US CLO secondary market today.

"It's a busy day today with a few more BWICs than we've seen in recent days," says one trader. "There's plenty of mezz and equity in for the bid and that'll provide a lot of data points on the follow."

The pick-up in secondary supply is no cause for concern, the trader suggests. "It's just a case of people seeing a couple of tight prints and trying to get on board."

The trader continues: "Most of the selling is hedge fund-based - the real money guys look to be holding on to what they've got. Overall, the market is currently very stable in high yield and especially loans and that's feeding through to us."

There are nine BWICs on the US CLO calendar for today so far. The largest away from the top of the stack is a $52.5m six line equity auction due at 11:00 New York time.

The list comprises: CGMS 2012-2A SUB, COV 2014-2A SUB, DRSLF 2013-26X SUB, TRNTS 2014-1A SUB, VENTR 2012-12A SUB and VENTR 2013-14A SUB. None of the bonds has covered with a price on PriceABS in the past three months.

Structured Finance

SCI Start the Week - 17 October

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

Pipeline
The long list of additions to the pipeline last week was once more driven by auto ABS. There were 18 ABS additions - more than half of them autos - as well as five RMBS, four CMBS and two CLOs.

The ABS were: US$271.5m Ascentium Equipment Receivables 2016-2 Trust; US$201.23m Axis Equipment Finance Receivables IV series 2016-1; CarMax Auto Owner Trust 2016-4; US$350m Credit Acceptance Auto Loan Trust 2016-3; Driver UK Four; US$346.9m Flagship Credit Auto Trust 2016-4; US$1.32bn Ford Credit Auto Owner Trust 2016-C; Globaldrive Auto Receivables UK 2016-A; US$1.28bn Honda Auto Receivables 2016-4 Owner Trust; US$188.75m Iowa Student Loan Liquidity Corp 2016A; US$1.04bn Mercedes-Benz Auto Lease Trust 2016-B; US$176.2m Orange Lake Timeshare Trust 2016-A; US$188m PFS Financing Corp series 2016-B; US$343.6m Prestige Auto Receivables Trust 2016-2; SCF Rahoituspalvelut II (Kimi 5); US$3.5bn Sprint Spectrum Co series 2016-1; US$452.25m State Board of Regents of the State of Utah Series 2016-1; and RMB3.46bn VINZ 2016-2.

AFG Series Trust 2016-1, €272m DCDML 2016-1; London Wall Mortgage Capital Fleet 2016-01, €420m RMBS Prado III and US$382.5m Tricon American Homes 2016-SFR1 accounted for the RMBS, while the CMBS were US$610m CGBAM 2016-IMC, C$352.35m IMSCI series 2016-7, US$301.5m InSight Issuer series 2016-1 and US$512m TRU Trust 2016-TOYS. The CLOs were €450m Avoca CLO XVII and Carlyle Global Market Strategies Euro CLO 2016-2.

Pricings
New issuance was concentrated on ABS and RMBS, although a few CMBS and CLOs priced as well. There were six ABS and seven RMBS, along with three CMBS and two CLOs.

The ABS were: US$168.53m CommonBond Student Loan Trust 2016-B; US$206.34m CPS Auto Receivables Trust 2016-D; €478m Matsuba 2016; US$1.01bn Navient Student Loan Trust 2016-6; US$325m Sierra Timeshare 2016-3 Receivables Funding; and €1.25bn VCL 24.

The RMBS were: Hawksmoor Mortgages 2016-2, US$100m NRZ Advance Receivables Trust 2016-T2; US$400m NRZ Advance Receivables Trust 2016-T3; A$1.5bn SMHL 2016-1; €266m SRF 2016-1; £1.24bn Towd Point 2016-Auburn 10; US$625m Westlake Automobile Receivables Trust 2016-3.

The CMBS consisted of US$214m COMM 2016-667M, US$400m JPMCC 2016-WIKI and US$355m STORE Master Funding series 2016-1. The CLOs were US498m Cedar Funding VI CLO and €414.2m Tikehau CLO II.

Editor's picks
Excess baggage: Loan-level disclosure requirements under Regulation AB 2 are expected to have a limited impact on ABS issuers and investors when they come into effect on 23 November. While the rules aim to boost deal transparency, scepticism prevails about the value they will bring...
Changing places: Valuation consultancies have been a key recruitment growth area over the past year - either through incumbent firms expanding their headcount or as a result of new market entrants. Valuations-based hiring at sell-side institutions is also active for roles that cannot be offshored, although opportunities are more limited, given banks' prevailing efforts to cut costs...
Euro ABS/MBS active: The European ABS/MBS secondary market is staying active this week. "The busy primary market is taking a lot of attention, but there's still a lot of activity in secondary," says one trader. "That activity mainly surrounds bid-lists where we're seeing bonds from all sectors and up and down the capital structure. For the most part, those lists are being met with good demand, both from real money and dealers building their balance sheets..."
Euro RMBS shelves debut: The inaugural rated deals from two new European RMBS programmes have been announced. Both platforms are backed by asset managers active in the structured finance space...

Deal news
• The first-ever risk retention-compliant single-borrower CMBS has priced. The US$214m COMM 2016-667M is secured by a first lien on the borrower's fee interest in 667 Madison Avenue, a 25-story office building in Midtown Manhattan's Plaza District submarket.
• The first-ever re-REMIC securitising GSE credit risk-transfer securities has hit the market. The US$159.61m Bayview Opportunity Master Fund IVb Trust 2016-CRT1 is collateralised by 12 CRT securities, comprising M2 classes from various Fannie Mae Connecticut Avenue Securities (CAS) transactions and M3 classes from various Freddie Mac Structured Agency Credit Risk (STACR) transactions.
• Sprint Corporation is in the market with a rare wireless spectrum securitisation. Dubbed Sprint Spectrum Securitization Series 2016-1, the US$3.5bn transaction features a three co-issuer structure intended to maintain the separate silos of license holders that exist prior to the transfer of the licenses to the issuers.
• Conn's has entered into an agreement to sell the previously retained class C notes issued as part of its Conn's Receivables Funding 2016-A consumer ABS from March (see SCI's new issue database). The face amount of the class C notes is approximately US$70.5m and Conn's will receive upfront proceeds of around US$71.5m, net of transaction costs.
• Moody's has placed the ratings of eight tranches from four RMBS issued by Nationstar HECM Loan Trust on review with the direction uncertain. Affecting US$278m of securities, the action follows notification of incorrect data provided by Nationstar when Moody's assigned its ratings.
• A meeting of the Stanton MBS I controlling class has been convened for 31 October to pass an extraordinary resolution that would see Cairn Capital replace Cambridge Place Investment Management as the ABS CDO's third collateral manager. Instead of receiving direction in writing from at least a majority of the controlling class, the trustee is seeking direction from two-thirds of the controlling class under the extraordinary resolution.
• Morningstar Credit Ratings believes that the US Department of Education's termination of its recognition of the largest accrediting agency of for-profit colleges - the Accrediting Council for Independent Colleges and Schools (ACICS) - intensifies default risk on US$400.6m of CMBS. Overall, 19 CMBS loans with an allocated property balance of US$549.5m have exposure to for-profit colleges that are accredited by ACICS.

Regulatory update
• The European Parliament discussed proposed amendments to the draft regulation for simple, transparent and standardised (STS) securitisation last week. Ahead of this exchange, eight European trade associations released a paper highlighting the importance of securitisation for jobs and growth in Europe and underlining their commitment to supporting a safe and sustainable market that serves the real economy.
• The Basel Committee has released a consultative document and discussion paper on policy considerations regarding the regulatory treatment of accounting provisions under the Basel 3 capital framework. This follows the adoption of provisioning standards based on expected credit loss (ECL) by the IASB and FASB.
• The US CFTC has voted to propose rules and interpretations addressing the application of certain swap provisions of the Commodity Exchange Act and regulations to cross-border transactions. The proposal defines key terms for cross-border transactions and addresses the cross-border application of the registration thresholds and external business conduct (EBC) standards for swap dealers and major swap participants.

Structured Finance

China tests 'may lie ahead'

While China's slowing economic growth has coincided with a slowdown in CLO activity in the country, other Chinese securitisation sectors have grown rapidly this year. However, despite strong issuance and no significant performance deterioration, S&P notes that there remain several concerns over the market's future and place as a viable funding alternative.

China is the world's second-largest securitisation market in terms of issuance volume and is the fastest-growing major market. Issuance for RMBS has gathered pace and auto loan ABS momentum remains strong, with 13 auto deals issued in the first nine months of the year.

Since 2008 there have been 35 auto loan ABS, totalling CNY98bn. Of the 26 auto finance companies, 12 have issued at least one ABS in China and six have issued multiple transactions.

There has also been a series of non-performing loan securitisations since May as the asset class is given a trial run. S&P expects further issuance once lessons are learned from these test transactions.

The issuance volume of securitisation transactions under the CSRC scheme has increased quickly and now matches that from the CAS scheme. This mainly consists of trade receivables, lease receivables and future cashflow from infrastructure projects.

Despite the slowdown in economic growth, loan delinquencies and losses have been stable across most Chinese securitisation transactions. Chinese RMBS mortgages typically have low LTVs, making borrowers' vulnerability to deterioration in the economic environment manageable, while auto loan ABS have also performed well.

CLO repayments have also remained stable, but there could be turbulence ahead. This is because of the direct exposure to corporate credits and the nature of concentrated pools, which make managing asset deterioration in particular sectors and regions more challenging.

For all the sound collateral performance to date, S&P notes that the compound effect of the slowdown in macroeconomic growth, the effect of economic rebalancing and pressure on business operations in some industries raises uncertainty over the future performance of assets across a variety of sectors. In the rating agency's view, the question over the robustness of deal performance amid the economic slowdown will not disappear.

"We believe some of the bearish views of China's securitisation performance might be overdone because they neglect the fundamental strength of the assets and the way the liability notes are designed. In our opinion, the economic slowdown in China is an important consideration for loan performance because losing high-growth momentum will affect many obligors' behaviour and could affect originators' underwriting practices. However, it is not a simplified single-solution scenario," says S&P.

The rating agency says that securitisations, by their nature as structured products, already attempt to anticipate and manage many of the macroeconomic risks. Meanwhile, risks such as asset quality in retail loans deteriorating due to industry competition are slim, but that the situation might change.

"Given the swift change in customer preference and increasing pressure to meet market demand, competition and customer targeting could result in quick deterioration in asset performance and credit underwriting standards. Historical performance data also might be less relevant or reliable to estimate future asset performance," S&P says.

The rating agency adds: "Another issue is that we do not know the correlation between asset recovery and macroeconomic stress. CLO and RMBS transactions rely on post-default recovery to provide credit support. If the economy suddenly slows, defaults might increase. The legal system's capacity to handle asset liquidations and the market's willingness to acquire collateral on sale could affect the timeliness and level of recoveries."

JL

CLOs

Refinancing activity accelerates

US CLO refinancing volume has shot up this month, impacting 14 deals for a total value of US$6.2bn so far, versus US$3.7bn seen during the whole of September. The increase in activity has created a clear term structure at the triple-A level.

Deutsche Bank CLO analysts note that for refinancing CLOs at or near the end of their reinvestment periods, the triple-A spread is at or above Libor plus 120bp. At two years until the end of the reinvestment period, the spread roughly ranges from plus 135bp to 145bp. And with 4-5 years left of the reinvestment period, spreads have ranged from 140bp to 165bp, with most of the deals clustering at 145bp-150bp.

"The liability spread reduction of refinancing a CLO with two years left of reinvestment is clearly less than when the CLO is within one year or less left of the end of the reinvestment period," the Deutsche Bank analysts observe. "However, for the investment grade part of the capital stack, spreads are as tight as they have been for at least a couple of years. At the double-A and single-A rated level, in particular, spreads have tightened significantly since the deals - now getting refinanced - were issued."

They add that the CLOs that have been reset or refinanced since the beginning of August have higher liability costs - ranging from Libor plus 195bp to plus 225bp - than other broadly syndicated loan CLOs. They also tend to feature higher market value overcollateralisation of their debt tranches.

Refinancing volume has been fairly evenly split so far this month, with eight plain vanilla refinancings executed, compared to six resets. While the plain vanilla refinancings in August and September typically involved CLOs that were at or near the end of their reinvestment periods, most of this month's refinancings have been CLOs with 18-27 months left of their reinvestment periods. The CLO resets have been near, at or past the end of their reinvestment periods and have generally been extended by 2-4 years.

With the market's focus on refinancings and resets, new issue activity has slowed somewhat. Six deals worth US$3.1bn have been issued this month, compared to US$8.2bn in September.

CS

CMBS

New standard to drive transparency?

A new Mortgage Industry Standards Maintenance Organization (MISMO) XML commercial rent roll standard is due to be released by the end of the month. As the CMBS industry grapples with the Dodd-Frank Act and transparency issues, some believe that including such files in investor disclosures pre- and post-securitisation is the most important remaining step issuers could take.

Rent roll information is crucial to understanding the value of a commercial property. By standardising this information, the aim is to reduce costs and resources, as well as enhance transparency around a property's creditworthiness.

MISMO had previously introduced standards for both residential and commercial property, but historically only the residential standards gained traction, mainly because the GSEs backed them. There has been some adoption of commercial on-site inspection standards, but the organisation's efforts to introduce a rent-roll standard in 2010 failed.

However, Fannie Mae became involved last year, providing the impetus to revisit the standard and make it as inclusive as possible. "We have made many changes, with the aim of covering all commercial real estate properties. In the initial standard, there were 25 fields, but now there are 87 - including aspects such as tenant sales and lease abatements," explains Jim Flaherty, founder of mortgage origination platform Backshop and ceo of CMBS.com.

He adds: "The main challenge was getting participants to tell us what they need - in terms of non-discriminatory housing policy, for example - and ensuring their commitment from a technical perspective. The hope is that as we roll the standard out and Fannie Mae uses its muscle to drive adoption, it will be accepted by the CMBS market and portfolio lenders, and then analytics vendors."

However, the concept of public disclosure of such information appears not to sit well with CMBS issuers and borrowers. Push-back by the industry has so far been property-specific, with retail posing the biggest concern, followed by the office and industrial sectors.

Flaherty nevertheless believes that once borrowers are educated about the benefits of the standard - including that loans are likely to be cheaper because investors feel more comfortable - their mindset may change. "Borrowers are required to submit rent rolls four times a year for the life of a loan, which is currently undertaken in an unformatted way. Issuers could require them to submit the data using the MISMO standard, which would save money for servicers, and investors and rating agencies are in favour of this. However, it remains to be seen whether borrowers will go along with it and if regulators will ultimately require it."

Beginning on 24 December, after a CMBS has closed, 160 data fields from the investor reporting package will be uploaded to EDGAR every month under schedule L of Regulation AB 2. "This required data includes everything else that is necessary to value a property, except a rent roll," Flaherty notes. "But this scenario doesn't meet the spirit of the law - which is to provide enough information to value an asset. The reason given by the US SEC for not including rent rolls was that there is no mechanism for including them, but now there is a mechanism, there is a chance to revisit its requirements."

He says the question now for the industry is where it should go from here. "Should we require the rent roll standard to be used for CMBS and what would that mean for issuers, borrowers and investors? Of course, there are pros and cons on both sides, but ultimately adoption of the standard will help to create a healthy and robust CMBS market."

CS

Structured Finance

Structuring alpha

Robert Allard, founding partner and ceo at Firebreak Capital, answers SCI's questions

Q: How did Firebreak Capital become involved in the securitisation market?
A: Firebreak Capital is categorised as a private debt fund, but this means different things to different people. Our background is in structured products (including securitisation) and we're seeking to employ this skill-set across the private debt universe. A more appropriate label for the firm is a structured private debt fund: we employ structured finance techniques in order to lend to private companies.

We're aiming to launch in 1Q17, but continue to line deals up to launch with.

Q: What are your key areas of focus today?
A: Our main business is with financial services companies; in particular, consumer finance companies or platforms active in the SME, equipment lease, residential or commercial real estate sectors. We're also active in lending against financial assets for non-financial companies, such as intellectual property in the pharmaceuticals or telecoms sectors.

We take the tried and tested securitisation framework and tailor it to the uniqueness of a borrower or the risk profile of a given pool, applying it on a private and small scale. Transactions are usually structured with two tranches, with the borrower owning the first loss.

Triggers are agreed to protect our senior investment and the borrower typically maintains the servicing of the pool. The structure could be made more complex for legal or tax requirements or for shorter-term financings, and could include a revolving/reinvestment period to improve duration.

Q: Which challenges/opportunities does the current environment bring to your business?
A: The opportunity is two-fold. First, due to onerous regulations, banks are generally unable to provide complex principal finance (they operate more as agents now), so structured solutions are more challenging for them. Second, the contraction of banks has precipitated the growth of non-bank financial institutions and fintech, and there is growing demand for structured finance solutions from these businesses.

Typically, these institutions have a growth arc where they struggle to find a financing solution that fits their development. We're aiming to fill the gap that exists between high net-worth individual or family office money, for example, and accessing the broader public markets. We can provide tailored solutions sized at US$10m-US$50m to suit this growth arc.

The majority of the intellectual and financial capital from the structured finance industry sits in large hedge funds and private equity funds now. For these players, the notion of allocating resources to a US$10m-US$20m deal is out of the question, so there is less competition in this space. Anything sized over US$100m is fiercely competed over, but competition removes our alpha proposition - which is driving the terms of a deal to structure attractive investments for our investors.

Q: How do you differentiate yourself from your competitors?
A: The typical direct lending approach is to aggregate whole loan portfolios and provide investors with broad exposure to these pools of loans. The first-movers in this space were relatively successful, but recent issues with some platforms and their business models - as well as rising defaults and charge-offs - has given investors pause. Our securitisation approach provides greater protection to investors, while the tailored aspect of the financing meets the requirements of the borrower.

In terms of our approach to the fintech space, the bar is high. Most organisations that approach us don't have the necessary corporate governance and risk controls in place for us to help.

One issue that some structured credit funds have is that their focus is too narrow and they are therefore forced to keep buying when levels become too tight. Similarly, narrowly-defined direct lending funds are forced to keep buying into tighter markets. But it is important to retain some flexibility and have a balanced approach to deliver an all-weather return strategy.

As previously mentioned, our focus on smaller opportunities means we face less direct competition, which allows us to drive deal terms and create attractive risk-adjusted returns for our investors.

Q: What is your strategy going forward?
A: We look to the public markets as part of a relative value framework. All else being equal, we want to get paid more for operating in the private market, but relative value can become inverted with volatility and liquidity issues in the public markets - for example, in February this year.

In this scenario, the private market can freeze up and the public market becomes cheaper. We have the ability to target the public market on a tactical basis, unless it becomes a more permanent repricing of risk, which will mean private markets repricing wider still. This speaks to the durability of private strategies and enables us to put capital to work in any environment.

Q: Which major developments do you expect from the market in the future?
A: We're seeing some normalisation post the Lending Club scandal and funding is returning to the marketplace lending sector. We received many calls from platforms in March and April and we expect similar situations to emerge again in the future. We'd rather deal with borrowers when they need us most.

We view the marketplace lending sector becoming better regulated and more discipline emerging around internal controls at platforms as positive developments for the industry. In terms of the bigger picture, rising rates in the US, Brexit, China issues and continued problems in Europe will continue to provide uncertainty and volatility in the market, which will be attractive opportunities to add risk.

CS

Structured Finance

Middle market pro recruited

Churchill Asset Management has recruited Leland Richards as an md. He will report to Randy Schwimmer, senior md and head of origination and capital markets.

Richards joins Churchill with more than 15 years of experience in middle market finance and strong relationships with leading middle market private equity firms and lenders. He previously worked at GE Capital, where he served as an md of sponsor coverage and led the structuring and underwriting of transactions with middle market private equity investment firms. Prior to joining GE, he held similar positions at a number of financial institutions, including Merrill Lynch, Citi and JPMorgan.

Structured Finance

Asset manager adds credit vet

Medley Management has appointed David Richards as an md and portfolio manager of its Sierra Total Return Fund. He will be based in New York.

Richards is a member of the board at American Capital and serves on its executive, audit and strategic review committees. He was previously a portfolio manager at Pine River Capital Management and has also worked at Goldentree Asset Management, Citadel Investment Group, Raymond James and SunTrust Banks.

Structured Finance

Tikehau creates new job role

Tikehau Capital has appointed Henri Marcoux to the new position of deputy md. He will be based in Paris and report to Antoine Flamarion and Mathieu Chabran.

Marcoux will supervise and coordinate the corporate and finance functions within Tikehau Capital, which currently manages €8.7bn invested in all asset classes. He has 21 years of experience in audit and financial management, including more than a decade at Groupe EPI, where he was cfo and a member of the executive board.

Insurance-linked securities

Arcus makes first addition

Lloyd's of London syndicate Arcus Syndicate 1856, which is fully capitalised with funds managed by the Credit Suisse ILS investment management team, has appointed Katie Higgon as an underwriter. She was previously at Aon Benfield, where she was a broker and client manager on the North American property team.

Higgon will report to Nicky Payne. She is the firm's first new underwriting addition since its launch.

Risk Management

Solutions chief named

The DTCC has promoted Timothy Keady to md of DTCC solutions and sales & solution delivery. He succeeds Donna Milrod, who is leaving the firm in November, and will report to president and ceo Mike Bodson.

Keady assumes responsibility for leading DTCC's solutions businesses of derivatives, collateral, institutional post-trade processing, entity data and data products. He retains his current responsibilities as chief client officer.

Based in Boston, Keady joined DTCC in January 2014 with the company's acquisition of Omgeo.

ABS

Cross-sector SLABS criteria finalised

Moody's has published its new cross-sector methodology for rating student loan ABS backed by pools consisting of both FFELP and private student loans (PSLs). The agency subsequently took action on 21 tranches across 13 transactions, affecting approximately US$506.5m of securities.

Moody's affirmed 13 tranches across seven transactions (accounting for US$266.5m), upgraded six tranches across five transactions (US$161.2m) and downgraded two tranches in one transaction (US$78.8m) as a result of the new methodology. The affected deals are: Brazos Student Finance Corporation (April 1, 2003 Indenture), AB Notes 1998 (new trust indenture), AB Notes 1999 (New Trust Indenture - First Issuance) and Series 2009-1; KeyCorp Student Loan Trust 1999-A, 1999-B, 2000-A and 2000-B; Panhandle-Plains Student Finance Corporation (2001 Indenture); and State of Ohio Student Loan Revenue Bonds (2001 Indenture - Ohio Centric Student Loan Program).

Moody's says the new methodology combines two distinct rating approaches that it uses to rate FFELP and PSL ABS. Recognising the different characteristics of FFELP loans and PSLs, the agency analyses transactions backed by mixed pools of student loans as though they were two separate transactions - one backed by FFELP and one backed by PSLs. The FFELP portion is analysed using the FFELP methodology and the PSL portion is analysed using the PSL methodology.

While the approach analyses the FFELP and PSL pools separately, it provides benefit to cross-collateralisation between the pools. To derive a rating for each security, the approach translates the model output for FFELP and PSL ABS into a Moody's rating factor. Then, the agency calculates the weighted average rating factor for each security based on the proportion of FFELP loans and PSLs.

The credit quality of the notes issued in mixed pool securitisations depends on the performance of both FFELP and PSL collateral, with the relative impact of either collateral type depending on the proportion of the underlying collateral pools it represents.

ABS

Model error disclosed

Fitch has disclosed that interest payments to the class E and F notes of SCF Rahoituspalvelut I (Kimi 1) were incorrectly modelled in its initial rating analysis of the Finnish auto ABS as senior to clearing the implied principal deficiency ledger (PDL). Correct modelling would have resulted in different model-implied ratings for two classes: one notch higher for the class D notes and one notch lower for the class E notes.

However, the agency says the error has had no effect on the class E rating, as its long interest deferral has led Fitch to limit the rating to double-B plus. Meanwhile, in correcting for the error for the class D notes, a rating committee may have assigned a rating up to one notch above the initially assigned rating of single-A minus.

Fitch has nevertheless upgraded the deal's class B (from double-A to double-A plus) and D notes (to single-A plus) on strong performance. The other tranches have been affirmed.

The underlying asset pool's performance has been in line with or better than Fitch's expectations and credit enhancement has increased for all classes of notes. About 37% of the pool has amortised since the transaction closed in October 2015, cumulative defaults to date stand at 0.2% and cumulative recoveries at 53%.

ABS

Chinese deals add to ABS traffic

Recent weeks have seen a flood of auto ABS deals announced (see SCI pipeline), but the trend is not constrained to the US and Europe, with Toyota now in the market with its first Chinese ABS of the year. It is the company's second Chinese deal overall and the first to be rated by Moody's.

The CNY3bn Toyota Glory 2016-1 deal is a cash securitisation of auto loans originated by Toyota Motor Finance (China) to obligors in the country. Moody's has provisionally rated the CNY2.53bn class A notes at Aa3, which matches China's local currency country ceiling.

The portfolio consists of CNY-denominated floating rate loans and is collateralised entirely by new cars from the Toyota and Lexus brands. The portfolio is highly granular and consists of 45,425 loans, with the 20 largest loans representing 0.42% of the portfolio.

Toyota's previous Chinese auto ABS - Fengyuan 2014-1 - was terminated at the start of this year with a cumulative default rate as a percentage of original balance of 0.88%.

Meanwhile, Nissan has recently closed its latest Chinese auto ABS. The CNY4bn VINZ 2016-2 ABS is the company's second Chinese transaction of the year.

Structured Finance

Enhanced CMO reporting due

FINRA is set to implement changes to TRACE trade reporting and dissemination for CMO securities on 20 March 2017. The authority says it will issue details regarding testing of these changes in a future technical notice.

The enhancements will include four components: real-time dissemination of securitised products data where CMO quantity is less than US$1m; publication of weekly and monthly files (via API and web) of securitised products data where CMO quantity is more than or equal to US$1m; a reduction of the reporting period for CMOs from end-of-day to 60 minutes; and the amendment of Rule 6730 to simplify the reporting requirements for transactions in CMOs executed prior to issuance. TRACE securitised products trade report users and market data consumers must accommodate these changes by 20 March.

FINRA notes that disseminated information will not include the reporting party, the side (buy/sell indicator), the contra party (dealer/customer indicator) or remuneration indicator. CMO transactions reported with a volume of US$999,999.99 or less will be disseminated with the actual volume of the transaction.

Structured Finance

Multi-borrower SFR loan transferred

The US$4m Delavaco loan, securitised in FirstKey 2015-SFR1, has been transferred to special servicing due to imminent non-monetary default. The loan has appeared on the master servicer's monthly watchlist since December 2015, based on a decline in occupancy below 80% - decreasing to 51% by August 2016 - as well as its failure to meet a debt service coverage trigger. Additionally, in December 2015, the borrower provided evidence of a change in property management companies without the lender's consent and failed to replace the existing manager with an approved property manager.

This latest transfer is the second from the three multi-borrower single-family rental securitisations rated by KBRA and one of six specially serviced loans in the sector. Of the remaining five loans, four were 60-plus days delinquent (as of the most recent remittance period) and were securitised in B2R 2015-1 and B2R 2015-2, while another - securitised in Colony American Finance 2015-1 - has been resolved.

As a result of the transfer, the special servicer will be compensated based on a monthly special servicing fee equal to the greater of US$2,250 per month and a twelfth of the product of the loan balance plus 0.35%. The special servicer could also be entitled to a workout fee of 2% of future principal and interest collections, should the loan be corrected, or a liquidation fee equal to 2% of the liquidation proceeds if the loan is subsequently liquidated.

The Delavaco loan was flagged as a KBRA loan of concern (K-LOC) during the agency's last surveillance review in April. This non-recourse interest-only loan has a fixed-rate of interest and was originated with a loan-to-value ratio of 60.2%. It is secured by 120 SFR properties located in Atlanta, Georgia.

The first special servicing transfer among KBRA-rated multi-borrower SFR transactions occurred in the CAF 2015-1 securitisation in November 2015. Although Colony American Finance was not obliged to repurchase the affected loan, it elected to repurchase the loan at par, which resulted in no principal loss or interest shortfalls to noteholders.

Structured Finance

SFR deal's unique structure assessed

The unique structure of Amherst's inaugural single-family rental securitisation (SCI 6 October) presents specific risks regarding alignment of interest, says Moody's. The rating agency believes this may be partially mitigated by a strong property management agreement and the expertise of Amherst affiliate Main Street Renewal (MSR).

Amherst will not retain any interest in the issued securities of AMSR 2016-SFR1 Trust or in the underlying properties and does not share any risk if the properties deteriorate. There is some exposure to reputational risk and loss of fees if the affiliated property manager is terminated for underperformance, but overall the link is weaker than in a typical SFR deal.

MSR will manage the properties as a third-party contractor, making its incentives weaker than a typical SFR sponsor. A typical SFR property manager is an affiliate of the borrower with equity in the properties, but MSR's incentive is only "to perform satisfactorily", Moody's suggests.

However, the rating agency notes that MSR is a "capable property manager", the property management agreement has unusually strong securitisation protections and also the buyer - Altisource Residential Corporation - has experience in acquiring SFR properties and will monitor the property manager. Moody's believes these factors will help to mitigate the alignment weaknesses.

Moody's has assigned the class A notes a Aaa rating.

Structured Finance

BDC performance picks up

With the exception of the oil and gas sector, US middle market performance continues to improve and optimism across the sector strengthen, which DBRS considers as positive for BDCs. Issuance of new middle market loans in 1H16 was subdued, however, as M&A activity was moderate and wider pricing kept many middle market companies on the sideline.

Concerns about energy exposure, the pace of potential interest rate increases by the US Fed and questions surrounding lacklustre global economic growth negatively impacted BDCs in 1H16. But those concerns began to abate during the summer, resulting in recovering share prices for BDCs and a return of meaningful new capital-raising by BDCs for the first time in more than a year.

Indeed, US$461m of secondary equity offerings were completed in the quarter. Further, BDC debt issuance totalled US$1bn during 3Q16, including a US$600m issuance from Ares Capital. This compares to US$257m in 1H16 for the BDC sector as a whole.

Over the next 12 months DBRS expects solid earnings performance, supported by good asset yields, and improving access to the capital markets at reasonable costs. The agency foresees some potential for weakening asset quality across BDC portfolios, but the rate of weakening will be primarily dependent on the pace of interest rate increases.

Nevertheless, any credit deterioration is expected to be manageable for most BDCs, given overall leverage of balance sheets. For the 53 BDCs tracked by DBRS, leverage stood at 0.71x at end-Q2, up slightly from 0.69x at year-end 2015.

The median for non-accruals in the 53 BDC portfolios included in DBRS's analysis increased as a percentage of total investments to 92bp at 30 June 2016, compared to 16bp at year-end 2015. DBRS notes that a large portion of the non-accruals were attributable to the troubled oil and gas sector, albeit BDCs have been proactively reducing their oil and gas exposures. As of 1H16, the average BDC exposure to oil and gas as a percentage of total investments at fair value had declined to 3.6% from 5.4% at year-end 2014.

As of 10 October 2016, 14 of the 52 BDCs followed by DBRS had share prices that were trading above their 30 June 2016 NAV. Meanwhile, 23 were trading at or above 90% of net asset value. This compares to 14 BDCs trading at or above 90% of their 31 March 2016 NAV at 1Q16.

Indeed, the overall discount to NAV of the 52 BDCs followed by DBRS narrowed to 13.5%, compared to 19% at end-Q1 and 30% at 11 February 2016.

Structured Finance

Climate finance scheme agreed

The Grand Duchy of Luxembourg and the EIB have launched the Luxembourg-EIB Climate Finance Platform, which aims to mobilise investment in climate projects. The initiative will contribute to the implementation of the Paris Agreement and marks the first time a European Member State has entered into such a partnership with the EIB.

Scaling-up private finance and deployment capacity is a priority of the international climate agenda and is one driver behind the EIB's new Climate Strategy, to which the new Luxembourg-EIB initiative contributes. It involves more high-impact projects, financial innovation and support of the green bond market.

The platform says that blending public with private capital is key to increasing the impact of climate financing. Under the initiative, the Luxembourg government will make available €30m of subordinated funding over the next three years for Luxembourg-based investment vehicles that finance high-impact climate projects. This funding will allow the EIB to co-invest, which should in turn attract third-party investors from the private sector.

The investments will focus on projects outside and within the EU. The EIB will apply its rigorous assessment for the identification of potential projects under the platform and will cooperate with the Luxembourg government to select suitable investments.

CDO

Trups CDO cures reported

The number of US bank Trups CDO combined defaults and deferrals declined to 14.8% at end-September from 15.5% a month previously, according to Fitch's latest index results for the sector. Approximately 0.6% of the drop is due to the cure of Flagstar Bancorp, representing US$209.5m of collateral across 18 CDOs.

Flagstar issued senior debt securities, together with a dividend from its subsidiary Flagstar Bank to repay approximately US$31m of deferred interest accrued since January 2012 (SCI 20 July). Seven other banks - across eight CDOs - accounted for the remaining US$54m of cures in September.

Further, seven performing issuers representing US$156m across 10 CDOs redeemed their Trups last month. The majority of the redemptions came from Zions Bancorporation, which redeemed US$115m across seven CDOs. Additionally, four cured issuers with a combined notional of US$33m in four CDOs redeemed their Trups.

One defaulted issuer with total notional of US$5m was sold from one CDO portfolio with no realised recovery. One issuer that has been deferring since November 2009 - representing US$7m in one CDO - was sold, realising a recovery of 9.6%.

Two issuers - representing US$23.5m of notional in four CDOs - re-deferred. However, there were no new deferrals or defaults during the month.

Across 73 Fitch-rated bank and mixed bank/insurance Trups CDOs, 219 defaulted bank issuers remain in the portfolio, representing approximately US$4.9bn of collateral. As of September, 79 issuers are deferring interest payments on US$627m of collateral, compared to 112 issuers deferring on US$1.4bn of notional at end-September 2015.

CDO

Further Stanton meeting called

A class B noteholder meeting has been convened in connection with Stanton MBS I, following one for the controlling class of the ABS CDO (SCI 11 October). The meeting - scheduled for 9 November - is to be held for the purposes of passing an extraordinary resolution that would allow NCB Stockbrokers to resign as Irish paying agent.

Pursuant to the implementation of transparency regulations in 2007, there is no longer any requirement for an Irish paying agent for transactions seeking a listing on the regulated market of the Irish Stock Exchange. Cambridge Place Investment Management, the collateral manager, is offering to pay a consent fee of 10 cents per €100,000 original principal amount of notes to the class B noteholders to vote in the meeting.

CLOs

Fresh CLO credit deterioration

CLO credit quality deteriorated in July across all cohorts, having stabilised in the spring and early summer, says Moody's. This deterioration was particularly pronounced for US CLO 1.0 deals.

The median WARF for US CLO 1.0s increased from 2527 to 2575, while the median WARF for US CLO 2.0s increased seven points to 2852. European CLO 1.0s' median WARF also increased seven points - to 2912 - and European CLO 2.0s' WARF increased 12 points, to 2706.

Moody's believes credit deterioration will continue for both US and European CLO 1.0s because deals continue to amortise rapidly. The number of outstanding deals has also shrunk meaningfully, magnifying the impact of a few deals on overall index performance. Of the 1.0 deals originally included in Moody's market pulse index, around a third of the US deals and half of the European deals remained outstanding as of July.

The rating agency reports that the median defaulted holding increased 12bp for US CLO 1.0s and 15bp for European 1.0s, to 3.27% and 0.56% respectively. Defaulted holdings for US and European 2.0s were largely unchanged.

New US defaults in July include Transtar holding company, which is held by 76 US CLOs with an average exposure of 0.7%, and CJ Holding, held by 25 CLOs with an average exposure of 0.3%. The slight increase in median European CLO 1.0 defaults largely stemmed from the default of a French retailer.

Median Caa exposure was largely unchanged for 2.0 deals and decreased for CLO 1.0s, with European exposure falling 117bp to 11.39% and US exposure falling 32bp to 6.59%. The decrease in Caa holdings was primarily attributable to credit risk sales and the increase in defaults.

Cash holdings increased for all cohorts, while overcollateralisation increased for 1.0s and was unchanged for 2.0s. The median US CLO 1.0 senior OC ratio increased by 302bp to 163.37%, while the European median junior OC ratio rose sharply by 104bp to 110.60% and the median senior OC ratio rose by 24bp to 194.46%.

CMBS

Credit metrics improving

S&P reports that credit metrics for conduit/fusion CMBS pools improved in several areas during Q3, compared with the first half of the year. However, the agency notes a slight upward trend in loss severities since the beginning of 2016, which is expected to continue as the large amount of CMBS maturities due in 2017 are worked through.

In Q3, the weighted average S&P LTV has decreased to 90.1% from 92.9%, the weighted average S&P DSC has increased to 1.80x from 1.54x and the percentage of lodging properties in preliminary pools is down to 16.6% from 19.5% earlier this year. In addition, while the full-term IO percentage increased to 28.6% from 24.4%, partial-term IO percentages declined significantly to 29.2% from 37.3%. For deals that priced during the quarter, issuer LTVs fell to 58.3% from 61.8% and DSC increased to 2.13x from 1.81x compared with first-half 2016.

These improvements were despite widening S&P NCF haircuts and value variances. S&P's preliminary analysis on third-quarter transactions resulted in an 11.2% weighted average NCF haircut to issuer-projected NCF and a 32.5% variance to the appraisal valuations. Both of these metrics are slightly worse than in the first half of the year, when its average NCF haircut was 10.4% and its overall value variance was 31.1%.

Meanwhile, effective loan counts (or Herfindahl scores) increased to 26.3 in Q3, versus 25.1 earlier in the year. However, there continues to be a substantial difference in the figures between preliminary and final pools.

The average delinquency rate for S&P-rated CMBS deals was 6.74% in Q316, which is 10bp lower than the 3Q15 average of 6.84%. The delinquency rate fell significantly for multifamily (by 2.23%) and rose for lodging (by 4.72%), retail (8.90%), office (8.17%) and industrial (8.48%), compared with 3Q15. The agency expects the delinquency rate to continue to be in the 6%-8% range, with a gradually ascending trend as the remaining 2006 and 2007 vintage loans mature.

In 3Q16, 178 loans with an original balance of US$1.87bn were liquidated, resulting in a 42% average severity rate. The average loss severity was 41.5% in Q2 and year-to-date stands at 38.2%, up from the 35.72% during the comparable year-ago period.

The 2016 maturing loan balance through end-September was US$70.3bn, 81% of which came from the 2006 vintage. Another US$16bn is expected to come due during the remainder of 2016.

Finally, the overall pay-off rate so far this year is 74.8%, with the majority of unpaid loans being extended. Pay-off rates by property type ranged from 96.2% (multifamily) to 52.2% (lodging).

Of the loans originally scheduled to mature from September to December 2016, 52.7% have prepaid and 7.25% are specially serviced. Maturing balances are set to increase in 2017 to US$93.6bn and then decrease in 2018 to US$8.1bn.

CMBS

CMBS reporting platform launches

DBRS has released a new CMBS reporting platform. Dubbed IReports, the loan-level reporting platform provides users with access to presale reports, surveillance updates, transaction information and contextual data.

Presale reports for each DBRS-rated US and Canadian CMBS conduit transaction will be available on IReports at issuance, with ongoing surveillance analysis and commentary as the transaction seasons. Registration and access to IReports is complimentary, with no subscription required.

DBRS has also updated its surveillance methodology for North American CMBS. The update mainly consists of edits and additional details regarding IReports, with no material changes and therefore no rating impact.

CMBS

CMBS maturity outcomes anticipated

US$119bn in outstanding performing commercial mortgage loans backing CMBS will mature by the end of 2018, says S&P, with around 77% of this concentrated in 2017. The rating agency has assessed the outcomes of the US$284bn by original balance worth of loans that have already resolved in 2014, 2015 and 2016 so far to provide a benchmark for potential performance for loans coming due between now and the end of 2017.

S&P analysed the loan resolutions by classifying them into buckets using their debt yield, present payoff performance and upcoming maturity amounts by calendar year, both overall and for property types. Payoff performance has been benign for 2014-3Q16 with a 77% successful payoff rate, but is expected to decline over the next 15 months, partly due to the less favourable debt yield characteristics of the remaining loans.

Nearly all loans with a debt yield above 12% refinanced successfully, but the percentage of payoffs fell significantly for loans below 8% debt yield. Debt yield is under 8% for the largest bucket of loans maturing in 2017, while the next largest bucket is in the 8%-10% range.

Applying the 2014 payoff experience by debt yield bucket to maturing loans in 2017, the maturity default rate would rise to 13%. That implies an extra US$12bn of defaults, in addition to the US$8bn of 2017 maturity loans that have experienced term defaults and are in special servicing.

For loans that experienced a term default in 2014-3Q16, the percentage experiencing a greater than 2% loss upon liquidation has fallen from 65% in 2014 to 49% in 2015 and 36% in 2016 through the third quarter. This is attributed to rising property values and other improving CRE fundamentals.

As with loss severities, resolution times are much longer for loans with debt yield below 8%. S&P's default studies show that longer resolution times are typically correlated with higher loss severities and that loans that experience term defaults have much longer average resolution times versus maturity defaults.

"While refinancing conditions have been benign over the past few years, we expect maturity payoff performance to deteriorate next year, when a large amount of loans become due. The severity of the deterioration depends on many factors," S&P says.

Positive factors include continuing moderate economic and job growth improving CRE fundamentals across most property types, as well as low interest rates and available yields driving demand in many locations. On the other hand, more loans maturing in 4Q16-2018 have lower debt yield than in previous years, while any increase in interest rates or signs of slowing growth could well hamper refinancings. Additionally, US risk retention regulations set to go into effect on 24 December (SCI passim) could add uncertainty regarding loan refinancings in secondary or tertiary locations.

Insurance-linked securities

Insurers test blockchain potential

A group of insurers and reinsurers are exploring the potential of distributed ledger technologies to better serve clients. To this end, they have launched the Blockchain Insurance Industry Initiative B3i.

The insurance industry and ILS market have been enthusiastic about the prospects of blockchain for some time, with Allianz Risk Transfer and Nephila Capital recently piloting the use of blockchain smart contract technology for catastrophe bonds (SCI 17 June). Allianz is now joined by Aegon, Munich Re, Swiss Re and Zurich in this latest initiative.

The five companies have agreed to cooperate for a pilot project using anonymised transaction information and anonymised quantitative data in order to achieve a proof-of-concept for inter-group retrocessions using blockchain technology. The feasibility study aims to explore whether the technology can be used to develop standards and processes for industry-wide usage and to catalyse efficiency gains in the insurance industry.

Risk Management

Analytics service enhanced

MSCI has rolled out what it describes as substantial updates to its fixed income risk model suite, including for securitised products. Key enhancements to the service include the addition of duration times spread (DTS) factors as indicators of risk and the introduction of basis factors.

The firm says that advantages of the DTS approach include having the ability to reflect changing quality quickly, reducing dependence on ratings agencies and recognising a return to calm in the market after crisis. Basis factors, such as cash versus CDS, provide insight and tools for managing liquidity risks.

Peter Zangari, md and global head of analytics for MSCI, comments: "Recent consolidation among fixed income analytics providers has forced many investment managers to explore alternative solutions. This major upgrade demonstrates our commitment to helping clients manage fixed income in today's yield-seeking environment."

Risk Management

Harmonisation consultation underway

The Committee on Payments and Market Infrastructures (CPMI) and IOSCO have published for public comment a consultative report on 'Harmonisation of critical OTC derivatives data elements (other than UTI and UPI) - second batch'. The report responds to the G20's agreement in 2009 that all OTC derivatives contracts should be reported to trade repositories (TRs), as part of its commitment to reforming OTC derivatives markets.

Following a 2014 feasibility study, the Financial Stability Board asked the CPMI and IOSCO to develop global guidance on the harmonisation of data elements reported to TRs and important for the aggregation of data by authorities, including the unique transaction identifier (UTI) and the unique product identifier (UPI). This consultative report is part of the Harmonisation Group's response to the FSB's mandate and complements the consultative report on 'Harmonisation of key OTC derivatives data elements (other than UTI and UPI) - first batch', as well as the consultative report on 'Harmonisation of the Unique Transaction Identifier' and two consultative reports on 'Harmonisation of the Unique Product Identifier'. The Harmonisation Group also plans to issue consultative reports on further batches of key data elements (other than UTI and UPI) in the coming months.

The group is seeking comments on the report by 30 November.

Risk Management

Clearing fees highlighted

ISDA has conducted an analysis of publicly available data on clearing and surveyed both EU and US small derivatives users. The move follows ESMA's proposal to allow these entities more time to implement the clearing mandate on concerns that they appear to be having difficulties accessing clearinghouses.

Among ISDA's findings is that over the past 18 months there have been significant changes in the market share and the level of required client segregated funds for cleared swaps held by the top US futures commission merchants (FCMs). These changes likely reflect FCM business model shifts, due to the impact of new capital requirements, as well as rising operational costs.

As a result, some derivatives users have faced dislocation from their existing FCMs and have needed to establish new FCM relationships in order to continue using swaps that are mandated for clearing. While it appears they have largely been successful in doing so, their costs are increasing, as FCMs impose minimum revenue thresholds for their swaps clearing clients.

Another finding is that monthly mandatory minimum clearing fees or minimum revenue thresholds appear to be standard among larger clearing members in the EU and are increasingly common in the US. In Europe, where there is no exemption from clearing for small financial end-users (as there is in the US), these fees will be especially significant. ISDA's analysis indicates the fees will range from US$100,000 to US$280,000 per year.

"It is difficult to precisely determine the total clearing costs that will be incurred in aggregate by small derivatives users based in the EU," the association observes. "ESMA estimates there are approximately 5,500 Category 3 financial counterparties. But a number of these are likely to be individual accounts managed by large asset managers that would not be subject to monthly minimums."

RMBS

Japan condo payments 'positive'

The high loan prepayment rate for condominiums backing Japanese RMBS is credit positive for the asset class, says Moody's. The prepayment rate is expected to remain elevated for some time.

Most Japanese RMBS deals have a sequential pay structure, with the high prepayment rate increasing credit enhancement at a rapid pace. The prepayment rate for condominium investment loans was 6.7% in July, and hit a record high of 7.9% three months earlier.

The high prepayment rate has resulted from an increase in full prepayments, which have increased mainly because of an increase in condominium prices leading to owners selling their properties to repay their loans. Condominium prices are expected to remain high, supporting Moody's view that the full prepayment rate will also stay elevated.

The partial prepayment rate is low and has remained stable, which is a trend that is expected to continue. There is no particular incentive for condominium investment borrowers to partially prepay their loans. This is in contrast to other residential mortgage loans in Japan, where the partial prepayment rate rises every January after outstanding mortgage amounts have been factored into tax credit calculations.

RMBS

SFIG files CRT opinions

SFIG has responded to the FHFA's request for information on Fannie Mae and Freddie Mac's credit risk transfer strategies. Along with its own letter, SFIG has also participated in the submission of a joint trade comment letter with organisations such as the American Bankers Association, Association of Mortgage Investors, Housing Policy Council of the Financial Services Roundtable, Mortgage Bankers Association and SIFMA.

SFIG's CRT response is supportive of the transactions in general, but argues that reinvigorating the private label RMBS market should remain an important priority for both the FHFA and broader housing finance industry. Its letter states that the best approaches to safely foster private label issuance are to decrease conforming loan limits and set guarantee fees to reflect the credit risk associated with a mortgage guarantee and the cost of appropriately capitalising the GSEs, given their systemic importance.

The joint letter calls for the continued refinement and experimentation in terms of how the GSEs conduct CRTs. It also says lenders need a level playing field to avoid skewing underlying credit risk and that the market needs visibility into the economics of various forms of CRT for the GSEs.