Contents

NPLs

Transfer pricing

Italian ABS hindered by NPL valuation issues

The securitisation of non-performing loans (NPLs) has been deemed a credible solution for Italian banks seeking to offload the assets from their balance sheets. Just one deal has launched to date, however. Getting a plausible valuation for the NPL portfolio being transferred to the SPV may be one of the main obstacles.

Francesco Franzese, founder and md of Aram Capital, says that banks must do justice to the valuation of the NPL portfolios in order to sell them without taking a huge loss. "Banks are keen to sell NPL portfolios, but in many cases the net book value is deemed too high and doesn't allow them to kick off a proper sale process. I believe this issue will remain for several years."

Following a set of initiatives set out by the Italian government over the past 18 months, many Italian banks are anticipating sales of large NPL portfolios into SPVs for securitisation purposes. The Italian government has agreed to guarantee the senior NPL ABS notes under its Garanzia Cartolarizzazione Sofferenze (GACS) scheme, while the fund Atlante II will invest in mezzanine notes (SCI passim).

Banca Popolare di Bari (BPB) was the first to close a transaction using the GACS guarantee scheme in August 2016, albeit the deal was retained with the aim of remarketing it at a later date. In this securitisation, the NPL portfolio was sold to the issuer for a price of €148.2m, or 30.9% of the gross book value.

Several factors drive the transfer price of an NPL portfolio to an SPV: the quality of the loans, the geographical location and whether the loans are secured or unsecured. However, the lengthy Italian legal process and the availability of loan data are two additional factors that may also be weighing on the NPL valuation process.

Getting hold of loan data can be difficult. Franzese says that banks rarely have an adequate and comprehensive database that will allow investors to make a fair evaluation of the portfolio.

"The lack of data is likely to result in a conservative NPL portfolio pricing," he notes.

David Bergman, vp at Moody's, highlights that the Italian legal process is among the slowest - or even the slowest - in Western Europe. "This is weighing heavily on the NPL portfolio sale process," he adds. "To go through a bankruptcy can take up to eight years - although with regional variations, this could be longer. For example, that figure could be doubled in Sicily. As a result, the present value of the cashflows generated by selling the assets is affected."

However, Bergman also says that the Italian NPL securitisation rated most recently by Moody's (BPB) had good loan level data. "This may be a result of the GACS guarantee on public NPL securitisations, which advises that special servicers should be employed for on-boarding of the portfolio and to help the seller fill in data gaps," he says.

He adds: "The public support from the state in Italy via GACS and strong work on the data sets from the special servicers could be important in developing this kind of market."

There are a number of considerations when valuing an NPL, according to Franzese, whose firm is involved with the origination and advisory of NPL portfolios for investors, as well as advising banks in the downsizing process of NPL stock. This includes a very thorough analysis and stratification of the portfolios through different parameters.

"For example, we even look at the borrower's and guarantor's age and if they have debts with other banks. We do a detailed valuation of the guarantees of the loan," he says.

For secured loans, Franzese says that he values each real estate asset to assess how much and when [funds] can be recovered through judicial procedures. "It is important to look at where the court is located, as this can have an effect on the timing of the procedures. It is also important to understand the local market specifics and the legal framework," he adds.

Additional recovery information can be gleaned from other guarantees - or guarantors. "In a high percentage of cases, you can recover more from the guarantor than from the borrowers," says Franzese.

While public Italian NPL ABS remain scarce, demand also exists for the purchase of Italian NPL portfolios in the private domain. NPLs can, however, only be bought through an Italian SPV or through a financial intermediary, as per article 106 of the Italian Banking Law.

Franzese notes that an increasing number of investors are now buying their own special servicing company to optimise the credit recovery process. "There's no question that there is a huge demand from international investors, but most of the sales are done through competitive auction processes, where there is a risk for investors in wasting time and money. For these reasons, some investors prefer to work on smaller deals outside of the competitive auction process, where more groundwork needs to be done."

Historically, the Italian market has had a strong track record for NPL ABS issuance - particularly in the period spanning from 1999 to 2007 - though public issuance has been on hold since then. However, banks including Banco Monte dei Paschi (BMPS) and Credito Valtellinese are expected to launch state-guaranteed ABS in the coming months.

"The expectation is that the performance of new Italian NPL ABS should be comparable, performance-wise, to previous transactions," says Bergman. "The only question mark may be that the macroeconomic scenario was slightly better in 2003-2007."

AC

Secondary markets

Euro ABS/MBS distracted

Activity in the European ABS/MBS secondary market continues to be light with participants focusing elsewhere.

"Secondary is still relatively quiet," says one trader. "The market continues to be distracted by primary, where there are currently a couple of new issues that we're working on, and obviously events in the US are also taking some attention today."

Nevertheless, the trader continues: "Secondary spreads remain firm despite the continuing new issuance. The only exception has been some very slight softness in non-conforming in recent weeks. That's merely a result of all the new issues in the sector and some dealers getting ahead of themselves earlier in the quarter, which meant that they have had to back off a little."

There are currently two BWICs on the European ABS/MBS schedule for today. The largest of which is a 21 line 55.405m euro and sterling mix that also includes some CLOs.

Due at 11:00 London time, the auction comprises: ATLAM 2 A; BERCR 9 A3; CADOG 5X A1; CASSA 2007-1 A2; CORDR 2 B; DRVUK 2 B; DRVUK 4 A; FSTNT 12 A; FSTNT 9 A3; FSTNT 9 A4; HARVT 8X C; HARVT 12X C; HIPOT 4 A; JUBIL 2015-16X C; LOGIS 2015-1X C; LWMC 2016-FL1 A; PMACC 2016-1 A; SPAUL 6X B; STORM 2016-2 A; TOWCQ 1 B; and TPMF 2016-AU10 A1.

Only CADOG 5X A1 and HARVT 8X C have covered on PriceABS in the past three months - last doing so at 100.21 on 14 September and 99.622 on 28 October, respectively.

Secondary markets

US CLOs resilient

The US CLO secondary market continues to hold up in the face of primary activity and the US election.

"New issues, refis and resets keep coming, but secondary has remained resilient in spite of the high volume of supply," says one trader. "We continue to see good demand throughout the capital structure, but particularly in triple-As at the moment, which have tightened a little in the last few sessions."

Today is understandably looking likely to be quieter than of late. "Of course, everyone is still effectively holding their breath over the result today, but up until now CLO secondary has been unaffected by the election headline volatility experienced elsewhere," the trader says.

There are four BWICs on the US CLO calendar for today so far. The chunkiest is a $23m three line list due at 10:00 New York time.

The double- and triple-B auction comprises: BLACK 2016-1A D, TRNTS 2016-4A D1 and TRNTS 2016-4A E. Two of the bonds have covered with a price on PriceABS in the past three months, last doing so on 17 October as follows: TRNTS 2016-4A D1 at 99.51 and TRNTS 2016-4A E at H90S.

Secondary markets

Euro secondary stable

The European securitisation secondary market remains stable despite wider market volatility.

The continuation of the buying bias and positive tone seen in secondary ABS/MBS in recent weeks ensured all sectors remained insulated from the big moves seen in equities and broader credit yesterday. Consequently, spreads were unchanged on the day and have stayed the same into this morning's open.

Inevitably dealers did re-rack their offers on the back of the US election news and a few opportunistic bids did emerge, but activity was limited across the board yesterday as investors kept their powder dry. Highlight of the day was a CMBS BWIC - involving DECO 2007-C4X A1, DECO 2014-TLPX A, DECO 2014-TLPX E, ECLIP 2006-2 D, ECLIP 2007-2X A, ESTON 2006-1 A1A and ESTON 2006-1 A2 - which produced some strong covers.

It was a similar story in CLO secondary with more buying interest than selling, though little actual trading. Indeed, the only BWIC on the day involving a single line of CGMSE 2013-2X SUB produced a DNT. Overall, after a little initial softness 2.0 spreads across the capital structure closed unmoved from the previous session.

There are currently no BWICs on the European schedule for today.

Secondary markets

US CLOs unmoved

US CLO secondary spreads remain unmoved despite the election result.

"It's certainly been interesting," says one trader. "If you'd told me two days ago that we'd have a Trump victory and CLOs would be unchanged I would've said you were crazy, but that's what's happened."

The trader continues: "A lot of dealers came in in the middle of the night Tuesday and began marking stuff down and offering it out for Wednesday's open. However, no one was hitting back bids and people were getting lifted, so by the close IG was unchanged from the previous day and double-Bs were up half a point."

Overall, the trader concedes that activity was fairly light on the day with focus more on rate products, but notes: "The appetite for risk assets in general is still very strong - S&P futures are already up another eight points, for example - and that can only help to support CLOs."

In the election's aftermath and in advance of a public holiday tomorrow, today is unsurprisingly quiet. There is currently one BWIC on the US CLO calendar for today - a five line triple-A list, which was due at 9:30 New York time.

The $188.736m auction consisted of: FLAT 2007-1X A1A, SRANC 2013-1A A2, SRANC 2014-2A A2, SRANC 2014-3A A2B and WESTW 2007-2A A1. None of the bonds has covered with a price on PriceABS in the past three months.

ABS

Innovative aircraft ABS well-received

The US$800m Blackbird Capital Aircraft Lease Securitization 2016-1 priced last week, with the senior notes heavily oversubscribed. The deal is noteworthy for featuring a super-senior tranche and a higher percentage of wide-body aircraft than most aircraft ABS.

Rated by KBRA and S&P, the transaction comprises: US$200m AA/AA rated class AA notes (which priced at a 2.50% yield for a 4.2-year WAL); US$540m A/A class As (4.25% yield, 6.1-year WAL); and US$60m BBB/BBB class Bs (6% yield, 6.1-year WAL). The unrated subordinated series D, E, R1, R² and R3 notes will be sold to Blackbird affiliates.

Scheduled principal payment for the class AA notes follows a straight-line eight-years-to-zero amortisation profile, which is faster than typical single-A rated aircraft bonds, while the class A and B notes follow a straight-line 16-years-to-zero amortisation profile. After the expected final payment date (15 December 2024), the tranches will receive turbo principal payments sequentially after all three series of notes' scheduled principal payments are met.

Deutsche Bank ABS analysts suggest that the class AA tranche was well-received due to its high level of cashflow and asset overcollateralisation, at a 19.25% LTV. The subordinate-lien class A tranche appeared to be less popular, however, with enthusiasm perhaps diminished by the loss of control inherent in having a super-senior class AA tranche above it and higher LTV (at 70%).

The Blackbird portfolio comprises 14 narrow-body passenger planes (nine A320 family and five B737-800), four wide-body passenger planes (one A330-300, two B777-300ER and one B787-9) and one Embraer E175 regional jet. The aircraft are leased or expected to be leased to 16 airlines in 13 countries with a 7.1-year weighted average remaining lease term.

At nearly 50% by value, the percentage of wide-body aircraft in the portfolio is higher than for most aircraft ABS, while the fleet age - 3.4 years - is younger than many other recent transactions. Based on the Deutsche Bank aircraft marketability grade spectrum, the 3.8 out of 4.0 grade (weighted by units, not value) for the Blackbird collateral pool is among the highest of any aircraft ABS transaction post-crisis, reflecting the ubiquity of the aircraft types in the transaction.

"The relatively high quality of the airline operators of these wide-body aircraft and long lease tenors of two of the four wide-body aircraft provides some comfort, but in general the idiosyncratic risks of a wide-body aircraft are far higher than for a narrow-body aircraft, we believe," the Deutsche Bank analysts observe. They note that wide-body aircraft have higher potential transition costs, overhaul costs and interior reconfiguration costs, as well as a more limited user base than narrow-body aircraft types.

Blackbird is a joint venture between Air Lease Corp and Napier Park. Bank of America Merrill Lynch, BNP Paribas and Mizuho arranged the deal.

CS

Structured Finance

SCI Start the Week - 7 November

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

Pipeline
There was another pickup in pipeline additions last week, as four new ABS, three RMBS and six CMBS were announced. The ABS were US$150m Diamond Resorts Owner Trust 2016-1, E-CARAT 7, C$426m GMF Canada Leasing Trust Series 2016-1 and CNY4.2bn Silver Arrow China 2016-2.

Brass No.5, US$187.9m Colony American Finance 2016-2 and £448m Towd Point 2016-Granite 2 accounted for the RMBS. The CMBS consisted of: US$452.3m CLMT 2016-CLNE; US$1.037bn Cosmopolitan Hotel Trust 2016-COSMO; US$767.6m CSAIL 2016-C7; US$280m CSMC Trust 2016-MFF; US$725m Hilton USA Trust 2016-SFP; and US$190.3m Velocity Commercial Capital 2016-2.

Pricings
There were fewer prints than there had been in the preceding week, although they still made for a respectable total. At the final count there were five ABS, one ILS, five RMBS, six CMBS and eight CLOs.

The ABS were: US$211.25m American Credit Acceptance Receivables Trust 2016-4; US$640m Apollo Aviation Securitization Equity Trust 2016-2; US$800m Blackbird Capital Aircraft Lease Securitization 2016-1; US$115.3m Golden Bear Funding Notes Series 2016-2; and US$184.477m GoodGreen 2016-1 Trust. The sole ILS was US$400m Residential Reinsurance Series 2016-II.

The RMBS were: A$300m AFG Series Trust 2016-1; US$1.024bn CAS Series 2016-C06; €692m Dutch Residential Mortgage Portfolio II; £775m Feldspar 2016-1; and €745m SapphireOne Mortgages FCT 2016-2.

The CMBS were: US$756.5m Citigroup Commercial Mortgage Trust 2016-3; US$1.175m FREMF 2016-K723; C$352.35m IMSCI Series 2016-7; US$301.5m InSite Issuer Series 2016-1; US$1.1bn JPMDB 2016-C4; and US$725.6m MSCI 2016-BNK2.

The CLOs were: US$411m Atlas VII; US$562.18m Bristol Park CLO 2016-1; US$495.9m CENT CLO 2014-22R; US$411m Golub Capital Partners CLO 33; US$609m OHA Loan Funding 2016-1; €413m OZLME CLO 2016-1; US$256m Tralee CLO 2014-3R; and US$328m Voya CLO 2014-1R.

Editor's picks
Deep pockets?: As a wave of US CMBS loans originated from 2004 to 2008 is set to mature over the next 18 months, there are concerns about the ability of these loans to refinance. However, some believe that the sector will see smaller losses than previously had been expected as alternative investment sources inject the required capital...
Converging approach?: Representatives from Chorus Capital, Citi and Clifford Chance recently discussed the current status of capital relief trades during a live webinar hosted by SCI (view the webinar here). This Q&A article highlights the main talking points from the session, including the impact of regulatory changes, the emergence of new assets and jurisdictions, and investor requirements. For a broader and more in-depth exploration of the RWA management space, attend SCI's Capital Relief Trades Seminar in London on 22 November (click here for details)...
US CLOs strong: Levels and activity are still strong in the US CLO secondary market, particularly lower in the stack. "It's pretty busy in secondary, even though the mad rush to print new issues is continuing," says one trader. "We're seeing a lot of mezz and equity going through at the moment - there are triple-A buyers out there, but not in force..."
GSEs announce validation frameworks: Both Fannie Mae and Freddie Mac have announced new validation tools aimed at making the mortgage origination process smoother for lenders and borrowers, with greatly reduced rep and warranty risk uncertainty. Fannie Mae's programme, which will be fully ready by 10 December, is called Day 1 Certainty...
Combo repacks emerging: Several CLO combo notes on downgrade watch, following Moody's updated methodology for the instrument (SCI 10 October), have been resolved via dual-tranche repacks with the aim of keeping the rating stable. The rating agency is reviewing 38 securities backed by CLO debt and equity tranches after adding a refinancing scenario to its approach...

Deal news
• Morgan Stanley has once again teamed up with Wells Fargo and Bank of America to market a US CMBS structured to satisfy risk retention rules on both sides of the Atlantic. MSCI 2016-BNK2 is sized at a little over US$700m and is understood to be the third private bond designed to meet risk retention requirements as the market continues to prepare for upcoming regulatory changes.
• A Chinese auto loan ABS thought to be the largest to date has joined the pipeline. Silver Arrow China 2016-2 is Mercedes-Benz's second Chinese auto loan ABS of the year and is almost CNY2bn larger than its last offering.
• UK non-conforming RMBS Leek Finance Number 18 is set to be redeemed on 21 December, five years after the original step-up and call date. Currently £617m of bonds remain outstanding from the transaction, which JPMorgan European securitisation analysts estimate equates to nearly 2% of the distributed UK NCF opportunities held by investors.
• Banca Popolare di Vicenza (BPVi) and Banca Nuova (BN) are set to repurchase on 1 November all the loans in Berica 6 Residential MBS that are classified as defaulted, as of 30 September 2016. The issuer will distribute the proceeds of the sale according to the transaction waterfall on the January 2017 IPD.
• Barclays has settled with Taberna European Capital Management, the collateral manager for both Taberna Europe CDO I and Taberna Europe CDO II, agreeing to discontinue legal proceedings and release claims. Following the settlement agreement, the Taberna Europe CDO II event of default that arose on 28 June has been irrevocably waived.
• Taurus (Pan-Europe) 2007-1 wishes to cancel its liquidity facility, after costs escalated sharply. The issuer has therefore contacted noteholders to seek permission.
• Moody's has assigned ratings to the previously unrated class E notes of two Ally Financial auto loan ABS. The affected transactions are Capital Auto Receivables Asset Trust 2014-3 (US$28m class E notes assigned an Aa1 rating) and 2015-1 (US$66m class E notes assigned a Baa1 rating).
• S&P has removed its double-A plus ratings cap on American Credit Acceptance (ACA) subprime auto loan ABS. The move means that the lender's latest transaction - the US$211m American Credit Acceptance Receivables Trust 2016-4 - is its first to achieve a triple-A rating on the senior class.
• Fitch has placed the class A notes - currently rated single-A - of Atlantes Mortgages No 2 on rating watch negative. The action follows the discovery of errors in the manual processing of the loan-level data and manual entry of data into the agency's EMEA RMBS surveillance model for Portugal.
• Fitch has placed the Minnesota Office of Higher Education Supplemental Student Loan Program Revenue Bonds 2010 Series on rating watch negative, due to data inconsistencies in the servicer reports. The June 2015 servicer report showed a cumulative gross default value of US$1.96m and net defaults of US$1.37m, while the September 2015 report showed gross defaults of US$1.37m and net defaults of US$709,891.

Regulatory update
• Nomura Asset Acceptance Corp and Nomura Home Equity Loan have agreed to pay the NCUA more than US$3m to settle claims related to the sale of RMBS that contributed to the failure of Western Corporate Federal Credit Union and US Central Federal Credit Union. The NCUA filed suit in federal district courts in California and Kansas against the Nomura entities. It will dismiss the suits as a result of the settlement, although neither Nomura entity admitted fault.
• Volkswagen has received final approval from a US federal court for a US$14.7bn settlement under which it will offer to buy back, terminate leases on, or repair around 475,000 vehicles affected by its diesel emissions scandal. Moody's believes this settlement is credit positive for the outstanding US auto lease ABS transaction issued by VW Credit as early lease terminations will increase prepayments to the securitisation trust.

Structured Finance

KKR targets shipping loans

Pillarstone, the platform set up by KKR to buy non-core and underperforming assets in Europe, seems set to take on underperforming shipping loans following the recruitment of former Frontline Management ceo Jens Martin Jensen. Indeed, the firm recently confirmed its involvement in a shipping-related securitisation.

Underperforming loans in the shipping sector have skyrocketed since 2008, as shipping operators have been challenged by overcapacity and untimely investments in bigger container vessels in the wake of the financial crisis. This has left banks in the US$400bn market with the challenge of offloading a string of non-performing loans.

Banks with exposures in the sector include BNP Paribas, Commerzbank, Deutsche Bank, HSH Nordbank, Lloyds, Nordea and RBS.

Pillarstone's business model regarding non-performing loans entails taking control of troubled firms and turning them around with new capital from KKR. The novelty is in the management of the bank loans, with the goal of attaining repayment and giving banks part of any extra profits. The firm's business model involves, as one Pillarstone representative tells SCI, "governance and management of the loans, without taking them off the banks' books".

Oliver Fochler, managing partner and ceo of Stone Mountain Capital, echoes a similar view when he states that private equity firms are "managing and restructuring" such capital-intensive assets. He adds that there is nothing surprising here, given the "tendency of private equity firms - within their newly founded debt units - to move towards high-yielding NPLs and private debt, due to yield compression."
 
Pillarstone already has a track record in the shipping loan space. In April it signed a deal with Italian shipping firm Premuda to manage €300m of exposures from UniCredit, Intesa Sanpaolo and Banca Carige. The Italian deal was followed in August by KKR's investment in NordLB's US$1.5bn portfolio, along with an unnamed sovereign wealth fund, as the German bank works to reduce its exposure.

Weil represented KKR in connection with the investment and the simultaneous establishment of a new shipping portfolio management company. The transaction is expected to be structured as a securitisation, with KKR, the sovereign wealth fund and NordLB participating as investors. The portfolio of performing and non-performing shipping loans will include up to 100 ships and is intended to form the seed mandate for the shipping portfolio management company, which will advise on the management of shipping loans and is designed to be open for use by third-party banks.

Jensen has thirty years' experience in shipping, including stints at Denmark's AP Moller-Maersk and at Island Shipbrokers in Singapore.

SP

Uncertain intentions

Valuers assess US election implications

The US has had its 'Brexit moment', according to a panel of valuations experts at a Duff & Phelps press briefing in London yesterday (9 November). However, while the timing of the Brexit vote gave funds but a matter of days to reflect the impact on asset valuations, the timing of the unexpected US election result should provide valuers more time to assess the implications.

"We wouldn't expect to see a great deal of impact on asset values at the 4Q16 reporting date," said David Larsen, md at Duff & Phelps. "It is more likely that the main impact would be seen at the end of 1Q17, when there is more clarity over [President-elect] Trump's intentions."

He added: "The Brexit analogy is the best we have when considering the immediate effect of the US election. Following the Brexit vote in the UK, there were several days of volatility before the market calmed down again. Even though there has been a momentary shock, it doesn't necessarily affect the underlying portfolio values."

Back in June, the Brexit vote result was announced just days before quarter-end valuations, meaning that there was a very short timeframe for values to be drawn up. In certain instances, quarterly valuations had to be delayed while the full ramifications were assessed.

Ryan McNelley, md of the alternative asset advisory at Duff & Phelps in London, agreed that parallels could be drawn between the US election result and Brexit. However, he said that while there was a degree of certainty regarding the Brexit vote and what it would entail - i.e. a reworking of trade relations - it is very difficult to predict what Donald Trump's policies will be.

"There's a higher degree of uncertainty about trade relations around the world," McNelley explained.

Indeed, there will be a great deal of uncertainty surrounding the intentions of Donald Trump's presidency, given the amount of political rhetoric and promises during his campaign. This includes Trump's intention to dismantle - or at least overhaul - the Dodd-Frank Act.

"There is a lot of uncertainty as to whether this was just political rhetoric or if he will actually go ahead with these plans," panellists agreed. They also suggested that all eyes will be on the selection of the new SEC chair and their scope for shaping regulatory reform.

"There will be a fair amount of waiting and seeing over the coming months," said McNelley. "We're in for a period - at least for the next four years - where there is going to be a lot of change."

He highlighted the triggering of Article 50 and the UK's departure from the EU, alongside the Trump presidency. "There is capital to be put to work, however. Investors will have to carefully measure their options. But they can't wait and see indefinitely."

Warren Hirschhorn, vice chairman at Duff & Phelps, concurred that larger funds have a lot of 'dry powder' following a period of fund raising. "They will have the ability to use those funds, should the right opportunity arise," he said.

Larsen added that investors still need strong returns and, given that the fixed income market is near record lows, there are limited returns in that sector. "Deals scheduled to close today may still close. Deals scheduled to close three weeks from now may close less quickly than anticipated."

Questions over how to price uncertainty into asset values were raised. Larsen suggested that despite the unexpected election result, deals would not necessarily stop coming to market.

"It will be possible to take some observations from the market from deals that take place," he said. "This will also give an indication on investor sentiment from a pricing point of view. We can also go back to the crisis of 2008/2009. Although we are in no way drawing parallels with that situation, we can see what a dislocation can do to asset prices - for example, how quickly prices may be impacted."

The overriding message from the briefing was that communication with investors will remain key - no matter what the ensuing volatility may bring. "Investors will want clarity," said McNelley. "They will expect a thorough analysis. They will also forgive you for not having a crystal ball - it is fine to acknowledge the uncertainty."

He concluded: "After Brexit, we found that a number of funds had a bias towards holding at cost - that is not what investors want. Even if you made the investment yesterday, cost is irrelevant. In some cases, such as credit funds, holding at cost can often overstate the value."

AC

Structured Finance

Americas head named

First Avenue has recruited Jess Larsen as a partner and head of Americas. He leads the firm's sales, distribution and origination efforts across North and South America.

Prior to joining First Avenue, he served as global head of institutional sales at Highland Capital Management, where he led a team of 12 through a successful restructure to produce a significant increase in revenues. Before that, he was a senior member of Bank of America Merrill Lynch's European Intro team. Other appointments include partner and head of sales at VCM Fund Management, the establishment and management of Merrill Lynch's European Family Office Group, as well as positions at UBS and HSBC.

Structured Finance

Technology agreement inked

CR has signed an agreement with Oxane Partners, which will see the two firms work in close cooperation to deliver industry-leading systems and technologies to support CR's expanding asset and loan management functions. As part of the agreement, CR has acquired an equity stake in Oxane.

The cooperation with Oxane will cover work within a number of areas, including analytics, reporting and business planning across the asset and loan management functions, and will provide further innovation for developing state-of-the-art technology platforms. Both CR and Oxane, however, will continue to operate their individual client mandates and relationships independently. Yet in order to cultivate cooperation and develop its own centre of technological innovation, CR will open an office based in Delhi, India.

Structured Finance

Manager makes double grab

ZAIS Group has hired Ahrash Daneshvar and Iris Arrington to its London office. Daneshvar takes up the role of md and Arrington, vp of client relations.

In his new role, Daneshvar will work on ZAIS's credit derivatives and quantitative trading strategies. He brings nearly two decades of structured credit and derivatives experience to the firm, after spending ten years at Morgan Stanley, where he led the company's structured credit business in London and New York.

Arrington will now manage and develop relationships with ZAIS's clients and investors in Europe. Prior to this role, she was vp of investor relations and sales at Marathon Asset Management.

Structured Finance

Kroll adds SF vet

Kroll Bond Rating Agency (KBRA) has appointed Patrick Welch as chief credit officer. He will report to president and coo Jim Nadler.

Welch joins from Goldman Sachs, where he spent 19 years and was most recently vp in the credit risk management and advisory department as well as deputy chief credit officer for GS Bank. He covered the structured finance and mortgage sectors.

Before Goldman Sachs, Welch was a director in S&P's structured finance ratings group. He covered several asset classes, including mortgages, credit cards, commercial paper and various international securitisations.

Insurance-linked securities

ILS firm swipes compliance vet

Markel CATCo has hired John Whiley as chief compliance officer. He previously worked as vp and head of ILS at Prime Management, a division of SS&C GlobeOp.

Whiley was at Prime Management, an independent service provider in the ILS industry, for 14 years. He then stayed with the firm after it was acquired by SS&C.

Risk Management

Start-up nabs derivatives expert

Axoni has hired Stephen Sandberg as director of client services. He will manage client engagements and oversee large-scale deployments of technologies at the blockchain start-up.

Sandberg last worked at Deloitte as senior manager working on sales and execution with financial institutions related to the impact of derivative regulations on trading technologies and business processes and also founded the Deloitte Advisory Blockchain Community of Practice. Prior to that he worked at the DTCC as the functional architect and head of data forensics for the global trade repository, with a focus on optimising derivative data management to meet business and regulatory requirements.

ABS

Non-compliance hits UK SLABS

Moody's has downgraded the ratings of three classes of Honours Series 2 and placed on review for downgrade two others, affecting £409.45m of securities. The action on this UK student loan ABS was prompted by the sharp increase in future costs associated with the non-compliance with applicable consumer credit legislation.

Specifically, Moody's has downgraded the class B notes to Ba1 from A3, the class C notes to B1 from Ba2 and the class D notes to Caa1 from B3 and kept them on review for downgrade. At the same time, the A3 rating of the class A1 and A2 notes was placed on review for downgrade.

In February 2016, a provision of £10.9m was included in the 2015 audited financial statements for the transaction. On 31 October, a notice to noteholders published by the issuer gave an updated estimate of these future costs of up to £34m.

The issuer estimates that around £22.5m of interest and charges would need to be refunded either via account book adjustments or by way of cash refunds. The notice also mentions that refunds may be owed to the UK government in respect of loans it repurchased under the cancellation indemnity.

The amount is estimated to be at least £750,000. However, this amount is subject to further investigation, as there may be additional amounts associated with subsidy payments that the government has already made.

The issuer informed noteholders that it will not be possible for the relevant affected accounts to be remediated through an automated process and that each account must be manually processed in order to properly remediate them. The remediation includes accounts that have repaid, but could have been affected since the change in the Consumer Credit Act 2006.

Moody's notes that this brings the total number of loans that must be investigated as part of the remediation up to 159,621. As a result, the issuer suggests that the remediation process will be lengthy and is likely to cost in the region of £5m-£10m for the services of third parties to complete it.

Assuming third-party cost of £10m, the updated remediation plan cost would total £34m, Moody's says. The closing qualifying loan balance as at 30 September 2016 is £167m.

The agency says that the downgrade of the class B, C and D notes is based on the assumption that the updated remediation plan cost will be fully borne by the transaction, without any recoveries from a counterclaim against any third party, therefore reducing significantly future cashflow available to repay the notes.

ABS

Spain consumer loan effect considered

Spanish consumer lending volume is rising, notes Moody's, albeit from a modest base and with further growth prospects limited by external pressures. While unsecured consumer loans are riskier than other types of lending, the rating agency does not believe underwriting standards have loosened too far and therefore there should not be much of a negative effect on Spanish ABS.

"Despite the increase in consumer loan origination, we do not anticipate a significant increase in risks on the balance sheets of the lenders (typically banks) that are originating the consumer loans, because as a loan sector, it still represents only a small portion of banks' overall lending," Moody's says. Underwriting criteria tightened significantly in 2008 but has loosened slightly since mid-2013 as a result of competitor pressures and improving economic expectations.

The country's political impasse has been resolved to an extent, but continuing political uncertainty may have knock-on economic effects, particularly on consumer confidence if there is weaker growth or higher unemployment. This might make consumers less willing to take on loans, limiting the growth rate of originations.

ABS

Six-year record for UK card ABS

The three-month average rolling charge-off index for UK credit card ABS marked its steepest quarterly deterioration since August 2009, says Fitch. It increased from 2.6% in 2Q16 to 3.4% in 3Q16, largely driven by charge-offs reported by Penarth and Gracechurch.

"The increase in Penarth's charge-offs simply reflects a return to the transaction's long-term band after the removal of 90-plus days past due accounts and addition of new accounts in 1Q16, whereas Gracechurch's three-month average charge-off was increased by accelerated charge-offs in July and another pick-up in September," says Fitch.

ABS

Reporting conventions compared

Moody's has published a study examining how auto ABS performance is reported the UK, German, Chinese and Australian markets. The agency notes that while central banks play a significant role in driving disclosure harmonisation in each of these markets with their specific reporting requirements, local peculiarities remain.

"There are many commonalities characterising ABS transactions across these four jurisdictions, yet performance reporting in their investor reports can vary significantly because of differences in how concepts such as arrears and defaults are defined," says Georgina Lee, a Moody's avp - research writer. "Moreover, local market peculiarities - such as the originator's treatment of write-off or restructuring - often lead to differences in performance reporting conventions."

As an example of differences, Moody's points out that investor reports in Germany, the UK and China typically define loans or leases as defaulted if they have been in arrears for a certain amount of time - although the amount of time differs, depending on the originator. By comparison, in Australia, a time-in-arrears-based definition for defaulted loans is not common.

In another example, in the UK and Germany, original loan-to-values (OLTV) are generally disclosed in investor reports. In China, OLTVs are reported during the 'issuance phase' of disclosure in offering circulars and for transactions with revolving portfolios, monthly investor reports provide details of the OLTVs of newly added loans.

However, in Australia, not all servicers report LTVs. One originator that serves the subprime segment reports current LTV, alongside the borrower's credit history.

ABS

FFELP criteria revised

Fitch has revised its criteria for rating US FFELP student loan ABS. The changes aren't expected to have any impact on outstanding ratings, however.

The revisions clarify how short-term assets - such as claims filed, pending interest subsidy payment and special allowance payments - are treated, as well as partial credit for sponsor's actions, prepayment calculations and reinvestment rates. They also clarify minimum parity requirements for double-A and triple-A rated notes and minimum liquidity requirements for all transactions.

Additionally, they introduce a constant default rate approach to cross-check gross default rates projected by the agency's default model and simplify the borrower benefits assumption. Additional sensitivity runs for maturity stress and reimbursement lags have also been introduced.

ABS

More downgrades for UK SLABS

Fitch has downgraded Honours' class B, C and D notes and maintains a rating watch negative on these and the A notes. The transaction is a refinancing of the previous Honours deal which closed in 1999, securitising student loans originated in the UK by the Student Loans Company.

Moody's recently downgraded Honours tranches and also maintained reviews for downgrade (SCI 8 November). Fitch's rating changes downgrade the B notes from single-A to triple-B, the C notes from triple-B to single-B, and the D notes from single-B to triple-C.

Fitch's rating actions and maintained rating watches reflect uncertainty around the potential liability from a Consumer Credit Act non-compliance investigation. The triple-C rating of the class D notes reflects the rating agency's opinion that default is a real possibility.

ABS

'Carriers benefit' from cellular ABS

The securitisation of the payments of cellular equipment instalment plans (EIPs) helps diversify cell phone carriers' financing, provides liquidity and can lower carriers' overall financing costs, Fitch comments. The agency adds that EIPs also help to bring transparency to consumers in terms of device cost rather than carriers heavily subsidising it.

The agency adds that handset financing is a financial operation and, as such, will deconsolidate such financial services debt in its analysis because deconsolidation makes the carrier more comparable to an issuer without EIPs. The firm rated the first public securitisation of EIPs, Verizon Owner Trust 2016-1 July (SCI 27 July), and expects to rate the second deal which is marketing - Verizon Owner Trust 2016-2.

Fitch adds that Verizon may contribute additional receivables to the trusts rather than pay off the bonds for up to two years, after which the trust will pay down for an additional two years. The transactions therefore gives Verizon greater flexibility by allowing for two levels of asset quality, corresponding to two levels of required credit enhancement.

Fitch suggests that these transactions have greater exposure to the credit profile and market position of the issuer than other consumer loan deals and that if Verizon itself is downgraded, it would affect Fitch's ratings on the deals. The agency comments that borrower payment behaviour would change significantly if the network is dissolved or large segments are divested.

Verizon, however, has a strong competitive position, low churn rates, high margins and extensive network coverage - with the dissolution of its network a remote risk, given certain acquisitions this year that broaden its network. For example, the firm is likely to close its acquisition of XO Communications' fiber network in 1Q17.

Structured Finance

APRA issues regulation responses

The Australian Prudential Regulation Authority has responded to submissions to its November 2015 discussion paper on revising its prudential framework for securitisation (SCI 26 November 2015). It has also issued a final revised Prudential Standard APS 120 and is consulting on its draft revised Prudential Practice Guide APG 120.

APRA has been working to update its regulatory framework to incorporate the most recent internationally agreed regulatory reforms and reflect the lessons of the global financial crisis. Its main initiatives are to provide more flexibility for banks in their funding arrangements, a simpler set of requirements for use of securitisation and simpler approaches to calculating regulatory capital requirements that appropriately reflect risk.

"To better reflect underlying risk and to address the lessons learned from the global financial crisis, APRA's initiatives and the Basel 3 securitisation reforms include more conservative regulatory capital requirements for some types of securitisation exposures," APRA says. "However, the underlying operational requirements for securitisation are either unchanged or have been simplified."

APRA's reforms to apply simpler approaches to assigning regulatory capital for securitisation exposures are intended to reduce the differential treatment of authorised deposit-taking institutions (ADIs) using advanced and standardised approaches to regulatory capital for credit risk, which may benefit competition. Its clarification of the regulatory capital requirements for warehouse arrangements is also intended to assist smaller ADIs in improving access to term wholesale funding, without creating undue prudential risk.

The revised APS 120 will take effect from 1 January 2018. In the coming months, APRA will separately consult on revised reporting requirements for securitisation that would take effect at the same time as the revised prudential standard and prudential practice guide.

Structured Finance

'Other CRA products' report released

IOSCO has published a consultation report on 'other' CRA products, seeking further insight into how market participants use non-traditional products or services offered by rating agencies. The report is intended to clarify information provided by respondents to two survey questionnaires which IOSCO published last year, and also asks respondents to comment on IOSCO's current understanding of such products.

IOSCO considers 'other' CRA products and services to include: private ratings; confidential ratings; expected ratings; indicative ratings; prospective ratings; provisional ratings; preliminary ratings; CDS spreads; bond indices; portfolio assessment tools; and other tools.

IOSCO's questionnaires were to determine the difference between traditional credit ratings and other credit-related products, and to learn how issuers, investors and other market participants use and understand other CRA products. As a result of these questionnaires, IOSCO has three main observations.

Firstly, some other CRA products share common processes and features with traditional credit ratings. Secondly, CRAs tend to create separate structures or business line organisations to offer other CRA products. And thirdly, other CRA products can be categorised in six primary groups.

IOSCO's report has a list of questions primarily aimed at rating agencies - largely concerning additional information IOSCO may have missed - but notes that other market participants are welcome to provide answers. Comments are due by 5 December.

CDO

Legacy CDOs unwound

Legal & General Group has unwound four CDOs, held within Legal & General Retirement, totalling over £1bn. The transactions were launched in 2007-2008 and held within an SPV.

The firm says there were no transaction costs associated with the restructuring and its Solvency 2 capital will reduce by circa £100m as a result. The future interest payments on the unwound CDOs will continue to be paid to Legal & General until 2017-2018, however.

Mark Gregory, Legal & General group cfo, comments: "This unwinding of the £1bn of CDOs has been executed effectively and delivers £100m of capital efficiency. It represents a further step in simplifying our asset strategy as we continue to focus on delivering better risk-adjusted returns for shareholders and benefits to pensioners."

CDS

ESMA consults on package orders

ESMA has opened a public consultation on draft regulatory technical standards (RTS) regarding the treatment of package orders under the amended MiFID II/MIFIR. Asset class-specific criteria have been developed for a few classes, including credit derivatives.

MIFIR's pre-trade transparency regime requires that trading interest in all non-equity instruments is disclosed, with certain exceptions if there is not a liquid market for the package order as a whole. ESMA's draft RTS establishes a methodology for determining package orders for which there is a liquid market in the EU.

ESMA says its methodology is based on qualitative criteria allowing it to take the characteristics of packages into account which are standardised and frequently traded. Based on this, orders that meet certain criteria, or are from specific asset classes - including credit derivatives - are subject.

Package transactions are interlinked financial transactions comprising various instruments which firms execute jointly in order to reduce transaction costs and for risk management purposes. ESMA is seeking input to its draft RTS by 3 January 2017. Standards will be finalised by February 2017, and the MiFID II regime will enter into force on 3 January 2018.

CLOs

Euro CLO refis anticipated

Strong issuance in Q3 of €4.63bn broke the quarterly record for the European CLO 2.0 market. Lower spreads at the top of the stack could incentivise older 2.0 transactions to refinance, which the secondary market should start to price in.

That previous record quarter was Q2, when €4.56bn was issued. Back in 3Q15, issuance was just €2.5bn.

Issuance for the first 10 months of the year reached €13.55bn over 33 transactions. S&P believes strong demand is being underpinned by wider conditions, such as central bank actions and the collapse in sterling.

"In CLOs, this price improvement led to a significant price tightening across the stack, with triple-A rated tranches tightening from 145bp-150bp at the beginning of the year to 115bp by the end of the quarter, and the subsequent low pricing of 98bp on BlackRock European CLO II," says the rating agency (see SCI's new issue database).

Other significant transactions included Accunia European CLO I from first-time manager Accunia Credit Management and the return to the European market of GoldenTree Asset Management with Laurelin 2016-1. However, while issuance has been strong, redemptions have slowed, as only Halcyon Euro CLO 2006-1 and Boyne Valley redeemed over the period.

Refinancing - the repayment of tranches financed by issuing new debt at a lower coupon - is a common feature of the US CLO market, but is rare in Europe. S&P figures show 21 refinanced US CLOs in Q3 alone, but only three for Europe in the entire period since the 2.0 market opened up.

"However, given the later start of the CLO 2.0 market in Europe, with spreads having tightened significantly, and with transactions now exiting their non-call periods, the chances are high that this type of activity will increase in the short to medium term," the rating agency notes.

US CLO refinancings have also been used to update or reset certain features, such as extending the reinvestment period, as well as the more obvious pricing changes. This has not yet happened in Europe, but with clear cost savings, S&P expects the market may see such a development soon.

S&P believes the secondary market should price in refinancing. The rating agency says: "Refinancing is standard practice in the US, and the language in European CLO 2.0 transactions very clearly allows this after the end of the non-call period."

It continues: "Given current market pricing, it would appear to be a cost-effective and efficient method of both increasing equity returns and improving ratings stability for rated tranches. Even though there have only been three refinancings to date, the implications are that we should logically expect to see an increased number of transactions following this route, and investors need to be aware of this feature from both a market value and portfolio management perspective."

CLOs

Healthcare exposure highlighted

Moody's reports that the healthcare sector is the largest industry exposure among the European CLO 2.0 deals it rates, accounting for 14% of collateral. While the credit quality of the issuers is slightly lower than for the broader CLO 2.0 universe, the rating agency has a positive outlook for the sector due to a number of market and fundamental factors.

After healthcare, chemicals (10%) and business services (8%) are the second and third largest CLO exposures respectively in Moody's universe. CLO-held healthcare issuers have a median weighted average rating factor of 2720 (comparable to a B2 rating) for exposures greater than 1%, while the CLO 2.0 portfolio WARF for all industries is 2703.

The top ten healthcare issuers represent 46% of CLO exposure to the sector. The top three issuers - HC Investments, BSN Medical Luxembourg and Convatec Healthcare A - account for 19% of the CLO funds invested in the healthcare sector.

The agency notes that demand for healthcare services is primed for growth as the Western European population ages. At the same time, the financial performance of issuers in the sector is non-cyclical, stable and predictable, which are attractive features for CLO managers. In addition, most CLO-held healthcare issuers are not dependent on government funding and thus austerity will not affect them as much as other healthcare issuers.

Finally, issuers that have the necessary certification are protected from competition by onerous regulation that deters potential entrants, according to Moody's. For instance, before commercialisation, medical devices need certification - the process of which is long and risky.

CLOs

Och-Ziff debuts Euro CLO

Och-Ziff Europe Loan Management has priced its debut European CLO - the €413m OZLME. The senior notes continued the slew of sub-110bp prints seen last month (see SCI's new issue database).

Rated by Moody's and S&P, the transaction comprises €230m Aaa/AAA rated class A notes (which priced at three-month Euribor plus 103bp), €63m Aa2/AA class Bs (plus 165bp), €24m A2/A class Cs (245bp), €17m Baa2/BBB class Ds (370bp), €25m Ba2/BB class Es (720bp) and €12m B2/B- class Fs (1025bp). There is also a €42m unrated equity tranche.

At least 90% of the portfolio must consist of senior secured loans and senior secured bonds, while the remainder of the portfolio may consist of unsecured senior loans, second-lien loans, mezzanine obligations and high yield bonds. The portfolio is expected to be at least 70% ramped, as of the closing date, and to be comprised predominantly of corporate loans to obligors domiciled in Western Europe.

Bank of America Merrill Lynch arranged the transaction.

CLOs

Duration extension considered

Fair Oaks Income Fund reports that the commitment period of the master fund ended in June. The company has subsequently introduced a redemption mechanism to return to shareholders capital realised from the fund and has made its first distribution under that mechanism.

However, Fair Oaks Capital believes that there is an ongoing opportunity to invest in US and European CLOs to generate attractive risk-adjusted returns. The company is therefore considering proposals under which shareholders will be offered an option to extend the duration of their investment through a share class that would retain a pro rata interest in the master fund and reinvest its capital distributions into a new master fund. The new fund will also have a limited commitment period and maturity, and will have similar objectives and terms as the current master fund.

Additionally, the company is considering its options to raise further equity through a new C share class. If issued, this would convert into the extended duration share class once substantially invested.

CMBS

EMEA delinquencies inch up

The 12-month rolling European CMBS loan maturity default rate in S&P's rated universe decreased to 21.1% from 29.8% in October. The delinquency rate for continental European senior loans increased to 68.6% from 67.8% during the month, while the rate for UK loans increased to 34% from 32.7%. Overall, the senior loan delinquency rate rose to 55.4% from 54.5%.

CMBS

Pay-offs move higher

The percentage of US CMBS loans that paid off on their balloon date moved modestly higher in October to 68.6%, slightly above the September level of 66.9% and the 12-month moving average of 66.4%, according to Trepp. By loan count as opposed to balance, 77.1% of loans paid off last month.

On this basis, the pay-off rate was about 10 points higher than the September level of 67.5%. The 12-month rolling average by loan count now stands at 70.4%.

CMBS

US property prices hit landmark

The Moody's RCA/Commercial Property Price Indices (CPPI) US all-property composite index increased 0.7% in September. Property prices are now up more than 100% since the January 2010 financial crisis trough.

Apartment prices rose 1% in September and prices in the larger core commercial segment rose 0.6%. Property prices are now up 21% on the November 2007 pre-crisis peak, with apartment prices 50% above their pre-crisis peak and core commercial prices up by 11%.

Retail is the only core commercial segment to see a price decline over the last three months and prices are down 0.6%. Hotel prices have gained 6.7% over 12 months, but underperformed the all property index by one percentage point.

Risk Management

Central clearing 'makes inroads'

New data shows that central clearing has made inroads into OTC interest rate derivatives markets, but is less prevalent in other OTC derivatives segments. This is according to the results of the BIS seminannual and triennial surveys of positions in the OTC derivatives markets, as of the end of June 2016.

By June 2016, 75% of dealers' outstanding OTC interest rate derivatives contracts were against central counterparties, compared with 37% for credit derivatives and less than 2% for foreign exchange and equity derivatives. Overall, 62% of the US$544trn in notional amounts outstanding reported by dealers was centrally cleared.

Additionally, it reports that the gross market value of OTC derivatives rose to US$20.7trn by the end of June 2016, up from US$14.5trn. Outstanding positions in OTC derivatives markets are concentrated among major dealers, with US$512trn (94%) of the total outstanding position in OTC derivatives markets reported by dealers from the 13 countries that participate in the semi-annual survey.

In terms of credit derivatives, the survey finds that in 2007 the sector was briefly as large as the FX derivatives market in notional amounts, but has steadily declined to US$12trn in outstanding credit derivatives to US$12trn by June 2016 from US$25trn by June 2013, also down from a peak of US$51trn in 2007. As a share of all OTC derivatives, credit derivatives fell from 10% to 8% between June 2007 and June 2016 in notional amounts and from 8% to 2% when measured at gross value.

BIS also finds that outstanding CDS contracts reported by seminannual dealers continued to fall in 1H16 from US$12.3trn at the end of December 2015 to US$11.8trn by the end of June 2016, with the market value of CDS continuing to decline. By the end of June 2016, it stood at US$342bn in gross terms and US$97bn in net terms, with the net measure taking into account bilateral netting agreements covering CDS, but is not adjusted for cross-product netting.

The decline in overall CDS positions reflects the contraction of the interdealer segment, according to BIS, as seen in the notional amount for contracts between reporting dealers falling from US$5.5trn at the end of December 2015 to US$5.1trn at the end of June 2016. Notional amounts with other banks and securities firms also fell in 1H16 from US$900bn to US$600bn.

It adds that the distribution of underlying reference entities indicates that the relative share of contracts referencing sovereigns stabilised in the first half of 2016, with the share of such contracts in the total notional amounts of CDS outstanding increasing steadily from 4% at the end of 2008, to a peak of 16% at the end of 2015. This remained mostly unchanged in 2016, with notional amounts referencing sovereigns down slightly from US$2trn at the end of 2015 to US$1.9trn at the end of June 2016.

Finally, BIS finds that the distribution of outstanding CDS by location of the counterparty did not change much as of the end of June 2016 and that CDS with counterparties from the country in which the dealer is headquartered accounted for only 25% of outstanding contracts as of the end of June 2016. It finds that most of the foreign counterparties were from Europe, followed by the US.

Risk Management

Framework recommendations released

The EBA has published a report on two new international frameworks proposed by the Basel Committee: a new standardised framework for counterparty risk (CCR) - the SA-CCR - and a new market risk (MKR) framework (the fundamental review of the trading book (FRTB)). In the report, the EBA focuses on the effects of these two frameworks for large and small firms, and issues recommendations on their implementation.

In particular, the report estimates the effect of the frameworks in qualitative and quantitative terms, as well as on certain business lines and/or markets, and highlights a number of interpretative and operational issues that might need to be addressed prior to the enforcement of the rules. Additionally, given the technical complexity that the new requirements might entail, the report evaluates the convenience of introducing greater proportionality into both frameworks.

Among the recommendations provided by the EBA is increasing the threshold value for small trading book businesses, below which institutions are able to use the non-trading book approach for the computation of capital requirements. It also recommends introducing a threshold for small derivative businesses, below which institutions are allowed to use simple approaches currently used for the computation of CCR capital requirements, subject to recalibration.

The authority also calls for the consideration of additional proportionality solutions for banks outside the traditional scope of the Basel standards that could include, for both CCR and MKR purposes, the use of approaches that are simpler and more conservative than the ones developed in Basel. Finally, it suggests that large technical parts of these international standards should be implemented using delegated acts or mandates for regulatory technical standards (RTS), so as to allow the EBA to reflect key changes in the regulation in a timely fashion.

RMBS

Foreign national risks highlighted

Mortgage loans made to foreign nationals in the US present some unique risks, Moody's notes. The agency says that although currently small, if exposure to such loans in RMBS grows as the market expands, lenders will need to adequately mitigate against the uncertainties associated with this lending.

"The main risks in lending to foreign nationals relate to a lack of credit history and verifiable income," comments Moody's analyst Padma Rajagopal. "Others include flight risk, foreign exchange risk and the possibility of deportation and other consequences of immigration policy."

In an effort to combat such risks, lenders usually charge foreign nationals higher interest rates. They also require additional compensating factors, such as higher reserves and down payments.

Higher reserve payments increase the likelihood that a borrower will consistently make timely repayments, according to Moody's. While for typical prime jumbo mortgage loans reserve requirements start at three months, for foreign nationals for whom the loan isn't for a home that will be their primary residence, they generally start at 12 months. To further protect their interests, lenders can require a portion of reserves to be held in a US bank account or, if they are a depository, in an account at their own institution.

Meanwhile, larger down payments mean borrowers have more skin in the game, making it less likely they'll default and walk away from a home. For foreign nationals who don't live in the US, lenders' loan-to-value requirements have been 50% to 70%, compared with up to 97% for permanent residents and US citizens.

Lenders can also mitigate the risks associated with loans made to foreign nationals by requiring co-signers, automatic payments and 12 months of credit card statements. Lending institutions might also restrict the types of properties they finance. For example, some limit loans to foreign nationals to single- or two-family homes, since properties with multiple units are more likely to include tenants from whom the borrower must collect rent in order to make mortgage payments - which may be challenging where the borrower has not resided in the US for long or may not live in the country at all.

RMBS

Debut Italian RMBS priced

Banca del Mezzogiorno has issued and retained its inaugural RMBS transaction, dubbed MCC RMBS. The €427.20m deal is backed by Italian residential mortgage loans.

Moody's and DBRS have rated the €320m class A notes (which priced at three-month Euribor plus 80bp) Aa2/AA, but the €107.20m class B notes are unrated. The deal is a static cash securitisation consisting of Italian residential mortgages to 4,397 prime borrowers and the current pool balance stands at approximately €418m.

Moody's highlights several credit strengths of the deal, such as the high quality of the collateral held in the pool (including its low LTV ratio), the absence of borrowers being in arrears and the fact that the pool consists of 100% first economic lien mortgage loans. Additional credit strengths include the use of full cash trapping, the simple waterfall structure and low servicing disruption risk, due to the presence of a back-up servicer.

Credit risks for the transaction are considered to be the low weighted average seasoning of the pool, with a weighted average seasoning of 1.96 years, as well as the lack of information on occupancy type. Additional credit risks include limited historical data and performance information on Banca del Mezzogiorno, the ability of the servicer to renegotiate the terms of the deal - such as interest rates - and finally that the transaction has no hedging agreement to mitigate the fixed-floating interest rate risk and basis risks.

RMBS

HMBS disclosures enhanced

Ginnie Mae is enhancing the disclosures relating to HECM reverse mortgage pools data in the existing Factor A II and Factor B II files. The first set of changes is in connection with populating data in existing fields.

Regarding the pool interest rate field, for all HMBS pools, this will contain the current period security interest rate. Previously, this field contained the original security rate for fixed rate HMBS pools.

Regarding the original interest rate field, this will contain the original at-issuance security interest rate. Previously, it contained blank spaces for fixed rate HMBS pools.

Finally, the prospective interest rate field will contain the prospective security interest rate that will be in effect for the next reporting period. Previously, it contained blank spaces for fixed rate HMBS pools.

The data enhancements will be effective with the regularly published Factor A II file to be published on 6 January 2017 and Factor B II file to be published on 10 January 2017.

The second change relates to the HMBS supplemental file. The final 'hsuppl_yyyymm.txt' file will be published on 6 December, with the layout and sample to be removed from Ginnie Mae's disclosure data download page on 5 January 2017.

RMBS

Spanish RPL correlation examined

Default driver analysis for Spanish re-performing (RPL) loans shows a positive correlation between the probability of default (PD) and the loan-to-value (LTV) ratio upon renegotiation, says Moody's. Foreign residents and those with homes on Spain's coast represent higher mortgage default risk.

"Foreign residents are twice as likely to default on their mortgage loans upon restructuring. A default by a foreign national on a Spanish mortgage would not affect their credit history in their home country, reducing their incentive to find solutions to payment problems and driving up default risk," says Rodrigo Conde, an avp at Moody's.

The agency suggests that borrowers in coastal regions are more likely to default than those in northern or central Spain. Loans in coastal areas are more likely to be backed by second/holiday homes and consequently have a higher propensity to default, as the borrower is more likely to focus on paying the mortgage on their primary residence first. This is set against the backdrop of falling house prices, especially in coastal areas, relative to other regions in Spain.

RPLs originated to purchase properties in coastal areas are almost twice as likely to default than loans for properties in Madrid, according to Moody's. Mortgages secured on homes in northern or central Spain are less likely to default than loans on properties in the capital because they are more likely to be owner-occupied. The probability of default on a loan for a second home is 30% higher than on a loan for owner-occupied property, regardless of the region.

Moody's says banks' own credit scoring systems have low default predictability power for RPLs because their credit scoring models are not calibrated for this product, resulting in weaker predictability than for performing loans. The rating agency notes that granting grace periods is not effective in reducing the probability of default because once a borrower has used remedial measures, they are more likely to default or to resort to those measures again, as their ability to pay is weaker than for other borrowers.

RMBS

GSE RPLs beating private-label

Re-performing loans (RPLs) owned, guaranteed or securitised by Fannie Mae and Freddie Mac will continue to outperform private-label RPLs, despite the negative performance impact on GSE loans from increased use of streamlined modifications in the coming years, says Moody's. GSEs will increasingly use streamlined loan modifications once HAMP expires, which is a credit negative because the other mods have looser documentation requirements.

The streamlined modification programme requires less documentation for a delinquent borrower to qualify for a modification than HAMP. It also does not require the same scrutiny over borrower income and financial position.

"Compared with streamlined modifications, HAMP modifications focus more on affordability and thus servicers will not give a HAMP modification if the delinquent borrowers' credit profile signals that the borrower will not be able to make the reduced mortgage payments. In contrast, under the streamlined modification process, servicers do not take any steps to establish and document the borrower's economic hardship, income or liquid assets to make an informed decision about the borrower's ability to make the reduced mortgage payments," says Moody's.

HAMP expires at the end of this year. However, Moody's believes that GSE modified loans will still have better credit quality than private-label RPLs thanks to stronger documentation requirements and servicing guidelines, as well as standardised delinquent borrower contact and loss mitigation procedures.

Loans modified under the Freddie Mac guidelines are expected to perform similarly to loans modified under Fannie Mae guidelines, as both agencies follow similar underwriting and servicing guidelines and have similar modification programmes. Strong servicing standards, better credit quality and documentation oversight will help GSE RPLs to continue to outperform private-label ones, says Moody's.

RMBS

BTL lending standards 'credit positive'

The UK Prudential Regulation Authority's new lending standards should improve the credit quality of UK buy-to-let mortgages, Moody's suggests. The agency says that the rules are credit positive because they reduce the risk of excessive losses in UK RMBS and covered bonds.

"The rules will reduce the risk of excessive losses and help prevent a weakening in mortgage credit quality. They would curb the ratio of the loan amount to house prices and prevent excessive BTL lending growth, which is credit positive," says Gaby Trinkaus, a vp-senior analyst at Moody's.

The agency expects the new regulations to prevent a relaxation in underwriting standards and ward off a deterioration in the credit quality of BTL mortgages. UK challenger banks are targeting the BTL lending sector and while their underwriting criteria are generally similar to those of more established lenders, some lenders could be tempted to relax their underwriting standards to gain or maintain market share.

The new standards, which start taking effect on 1 January 2017, include minimum requirements for setting stressed interest rates and the interest coverage ratio. Moody's considers that they may somewhat mitigate performance risk for BTL mortgages to an extent, if the UK were to leave the EU.

RMBS

Dutch arrears 'lowest since 2009'

Dutch mortgages in late-stage arrears are at the lowest levels since 2009, due to an improved macroeconomic background and proactive servicing, according to Fitch. The agency finds that of its rated RMBS, only 0.38% of mortgage loans were more than three months in arrears in 3Q16, down from 0.69% a year earlier.

This is partly due to the addition of recently closed RMBS deals to the agency's index and the restructuring of one deal, but arrears have fallen across older deals and the proportion of loans in arrears by between one and two months has decreased. Fitch suggests that this shows a "fundamental performance improvement", due to economic growth, low interest rates and innovations in servicing, which has resulted in three-month arrears falling steadily since late 2014.

Economic growth has been seen in steady GDP growth of 2%, and disposable income is set to increase due to low inflation, income tax cuts, wage increases and falling unemployment. Alongside this, low mortgage rates are cutting monthly mortgage payments, limiting the number of borrowers who become distressed.

Proactive servicing techniques are also easing the burden on borrowers in financial difficulty, with third-party servicer innovations making servicing generally more efficient through the use of data analytics, risk profiling and technological improvements. Fitch adds that the third-party servicing model has grown to reflect the entrance of new lenders to the Dutch mortgage mortgage market and outsourcing by established lenders.

The agency forecasts that these trends will support a further reduction in arrears rates, but adds that with Dutch arrears being already the lowest in Europe, they may stabilise in the medium term. Combined with a continued housing market recovery, the agency expects annualised period losses to fall as forced sales drop.

RMBS

Reperforming loan bid wins

Towd Point Master Funding (Cerberus) has been confirmed as the winning bidder on two pools of reperforming loans sold by Fannie Mae. The pools consisted of 3,500 loans totalling US$789.2m in unpaid principal balance.

The loans were marketed to potential bidders from 11 October (SCI 12 October). The eventual cover bid price for the two pools was 88.15% of unpaid principal balance.

RMBS

Ocwen rankings affirmed

Moody's has affirmed its master servicer assessment and servicer quality (SQ) assessments for Ocwen Loan Servicing at SQ3, as a primary servicer of prime, subprime, second lien and special servicer of residential mortgage loans. The agency says that the company has continued to demonstrate above average performance metrics across its operational areas, including collections and loss mitigation.

Moody's notes that during the review period, Ocwen improved its risk management, quality control and compliance processes by enhancing its oversight and monitoring procedures and increasing staff in these areas. The SQ assessments reflect Ocwen's above average collections for subprime and second lien loans, and average collections for prime loans. The company's loss mitigation abilities, as well as foreclosure and REO timeline management are assessed above average, while the company's loan administration function is assessed as average.

However, the agency views Ocwen's servicing stability as below average. The company is currently unable to acquire new mortgage servicing as part of its agreements with the New York Department of Financial Services and California Department of Business Oversight. Ongoing inquiries by the US SEC and CFPB also remain, along with continued oversight by multiple regulatory monitors.

As of 30 June 2016, Ocwen's servicing portfolio totalled approximately 1.47 million loans for an unpaid principal balance of approximately US$219.5bn. Moody's notes that the portfolio has declined from the prior review, due in part to the company's decision to sell a significant portion of GSE mortgage servicing rights.

RMBS

Simultaneous servicer ratings action

Fitch has simultaneously affirmed and withdrawn Seneca's US RMBS servicer ratings. It has affirmed the rating of RPS3 on the prime product for the US primary servicer, and RSS3 for the primary special servicer.

At the same time, the agency has withdrawn Seneca's ratings due to the lack of information to support the ratings and the completed sale of Seneca's servicing platform and the subservicing of the existing Seneca-owned mortgage servicing rights by Nationstar Mortgage.