Contents

CLOs

Fine tailoring

CLOs to remain buoyant into 2017, despite loan fund competition

Open-ended loan funds in Europe have grown in volume, attracting institutional investors hungry for yield, while fears over a Fed rate rise has reversed outflows from loan funds in the US. Although loan funds globally could pose a threat to CLOs in terms of issuance and investor appetite, the sector will continue to be buoyed by investors that employ a tailored risk-return approach.

Europe-domiciled open ended loan funds have seen significant annual growth of 50%-60% in the last five years and - with around €40bn in managed assets - have come to almost match the European CLO sector in size, according to a recent Fitch report. The agency notes that this growth has coincided with a shift in investor base away from purely banks towards institutional investors.

At the same time, CLO spreads globally have tightened significantly, particularly at the top of the capital structure. Last month, for example, BlackRock European CLO II printed at 98bp over three-month Euribor - the tightest senior spread on a European CLO since the crisis.

In the US CLO market, JPMorgan CLO analysts note: "In the post-crisis era, the basis between single-A and triple-A is currently the lowest it's ever been, and the basis between double-A and triple-A has been slightly lower only during brief periods of 2013."

The sectors that loan funds invest in are broadly comparable to those that CLOs invest in. However, European loan funds have greater maximum issuer and industry exposure, are more able to invest in non-base currency exposures, diversify into other asset classes - such as infrastructure or commercial property debt - and run larger bond exposures than CLOs.

While conceding that loan funds have their merits, for Pearl Diver Capital partner Matthew Layton, there are many reasons why his firm invests in CLOs. The fact that CLOs are a structured product, for example, means he can tailor his approach depending on the amount of risk he wants to be exposed to.

He says: "CLOs provide a way to invest right across the capital structure, depending on your risk appetite, from the triple-A tranche all the way down to the equity. The great thing about CLOs is that you can select your level of risk appetite."

He adds: "To look at it another way, CLOs provide a way to target different return profiles. For example, you could achieve high-teen to low 20% private equity-style returns by investing in the CLO equity tranche, or you can target 100bp-150bp level returns through the triple-A tranche, plus anything in between, from the double-As to the single-B tranche."

While the senior notes may have tightened significantly, high returns are still possible with CLOs, along with added benefits. Layton explains: "Loan funds offer returns similar to what can be achieved by investing in the mezzanine tranches of a CLO. The benefit of the CLO tranche, however, is that there is protection via structural subordination, alongside credit quality controls embedded within the CLO indenture."

Loan funds do, however, offer benefits to investors that they may not necessarily get with a CLO. For instance, institutional investors may enjoy the ability to dictate the terms in loan funds and through a mandate to a loan manager, they might be able to customise the offering through bilateral negotiations. Equally, as Layton suggests, CLOs are a more technical product, which could push investors towards loan funds.

However, the technical nature of CLOs can be a strength. As Layton notes: "A range of tests and triggers act to protect investors by ensuring credit quality in the underlying loan portfolio relative to economic tests designed to protect returns. Additionally, CLOs are ratings-driven, adding further protections to the investor. Combined, this means that managers are naturally pushed to create highly diverse portfolios with controls on credit quality."

Also, although yields on CLO triple-A and double-A notes have fallen, they still provide a suitable opportunity for conservative investors. Institutional investors - which may include banks, large money managers or pension funds - may typically invest in the senior tranches of a CLO and target spreads of 100bp-200bp, according to Layton.

He adds that tighter spreads don't have to correlate with a negative impact on CLOs, but can in fact benefit the CLO structure. "CLOs might be tightening, but the plus side of this is that it can benefit the equity tranche and bring general benefits throughout the structure."

Berkin Kologlu, md and senior portfolio manager at Angel Oak, is less confident about the ability of CLOs to ward off the threat of loan funds and sees them as real competition to the product - both in terms of issuance volumes and investor appetite. "Loan funds are definitely a threat to the CLO arb," he comments.

He says that while in the US there were large outflows of loan funds at the start of the year, the threat of a Fed rate rise has reignited interest in them again. Equally, he believes that low yields in CLOs will not help their cause.

"Rate increases in the front end should continue to push up demand for the loan funds. If this coincides with continued tightening on CLO spreads, then that will minimise the impact on CLO creation," Kologlu observes.

He continues: "If CLO spreads remain tight, they will certainly struggle with increased demand in loan funds. Given these scenarios, the loan market might come to outperform the CLO market because retail flows can lift the loan market a lot quicker than they can lift the CLO market."

Additionally, the ease of investment into a loan fund can boost its appeal, particularly for investors that want to act quickly. "If you think rates are rising, you can take a position in a loan fund, an ETF, tomorrow. But it's not so easy to take a position in a CLO," Kologlu says.

However, lack of liquidity combined with long loan settlement times can mean that investors in loan funds cannot exit their positions quickly. In Europe especially, loan funds are relatively small, meaning that it is harder for investors to sell out of their position easily without affecting the price of the fund.

Settlement times for loans - while an issue in the CLO market too - pose bigger problems for loan funds, according to Layton: "For both loan funds and CLOs, loan settlement time has always been an issue, reducing liquidity further - and this can force loan funds to hold higher cash balances to cover redemptions and cash balances are a drag on returns. In comparison, CLOs have locked in term financing and cannot have redemptions, which allows them to run lower cash balances," he says.

In general, Layton doesn't necessarily believe that loan funds pose a significant threat to CLO issuance and suggests current figures indicate that loan funds and CLOs can co-exist. "There is no sign so far that CLO issuance is being cannibalised by loan funds and I do not see it happening. Issuance has accelerated throughout 2016 in the US and Europe is now on track to record the highest CLO issuance since 2007. At the same time, loan fund AUM has continued to grow, so the evidence strongly suggests that the two can exist side-by-side."

Moody's figures show that European CLO issuance is up 78% in 2016, compared to the same time last year. The agency suggests that this is "largely due to investor demand for senior notes".

Layton concludes that while loan funds might be growing in size and attention, both in the US and Europe, CLOs have a strong legacy that cannot be ignored. "CLOs also have the backing of history - they were far and away the stand-out product of the financial crisis; undeniably the outperformer."

RB

Secondary markets

Euro secondary softens

Declines in the bond market have begun to feed into the European securitisation secondary market.

While sentiment continues to be generally positive across secondary, investor interest appears to have thinned since the end of last week with the spike in rate volatility. At the same time, some softness is appearing in spreads in certain sectors.

Peripheral and UK RMBS are the hardest hit in ABS/MBS so far this week. Meanwhile, CLOs lower down the stack, notably triple-Bs, are edging wider as well.

There are currently five BWICs on the European schedule for today. The largest of which is a ten line 42.873m mixed euro and sterling ABS and RMBS list due at 11:00 London time.

The auction consists of: ATLAM 2 A, BERCR 9 A3, KIMI 3 B, MONVI 2014-1 A, PARGN 18 A, STORM 2016-2 A, TENDE 2012-1 A, TOWCQ 1 B, VERSE 3 SNR and VERSE 4 SNR. Four of the bonds have covered on PriceABS in the past three months, all on 8 November - ATLAM 2 A at 88.61; BERCR 9 A3 at 99.61; STORM 2016-2 A at 101.9; and TOWCQ 1 B at 101.45.

Secondary markets

US CLOs slow

Activity in the US CLO secondary market continues to be very light post-election and last Friday's holiday.

"It's very, very slow with no volume to speak of on BWIC," says one trader. "The most notable list today is a mix of mezz and equity, but we're not even sure if all of that will trade and the seller is often reticent with colour, so we may not get any direction from it anyway."

The trader continues: "There just aren't any visible sellers at the moment - I'm hearing most people say there's not a lot of reason to buy since the election and given that decent paper is hard to replace they're hanging on to what they've got. As a result, for now at least, we're just drifting sideways."

However, bigger movements are being seen in relation to the primary market. "CLO spreads continue to be bifurcated between new issue and secondary - for example, double-Bs are 50-75 wider than secondary right now," the trader says.

There are three BWICs on the US CLO calendar for today so far. The largest is the above mentioned $31.2m five line mezz and equity combination.

Due at 14:00 New York time the list comprises: ARES 2012-2X E, ATCLO 2013-2A B2L, BABSN 2013-IX SUB, CAVY 2013-3A D and CRMN 2013-1A SUB. None of the bonds has covered with a price on PriceABS in the past three months.

Secondary markets

Euro ABS/MBS unchanged

There's been little movement in the European ABS/MBS secondary market this week, so far.

While sentiment continues to be positive, volumes have remained low this week as most investors appear content to sit on the sidelines for now. What activity there has been has revolved around prime assets and Street trading. Consequently, ABS/MBS secondary spreads across the board have remained broadly unchanged over the past two sessions.

The lack of volatility in ABS/MBS has also meant that few sellers have been coming to market. However, there are currently three BWICs on the European schedule for today and two of those are sizeable.

At 13:30 London time there are 19 lines of peripheral mezz totalling €66.487m original/€46.2+m current face. The auction involves: BCJA 5 C, BCJAF 5 B, BCJAM 1 D, BPMO 2007-1 B, CORDR 2 B, INTS 3 B, LANSD 1 M1, LANSD 1 M2, LUSI 3 B, LUSI 5 D, MAGEL 1 B, MAGEL 4 A, MODA 2014-1 E, PAST 4 D, RHIPO 7 B, RHIPO 8 B, TDA 14 B1, TDAP 1 C and UCI 9 B. Only CORDR 2 B has covered on PriceABS in the past three months - at 96.92 on 8 November.

Then, at 14:30 there is a 14 line €1.8+bn original/€199+m current face collection of Italian ABS and RMBS seniors comprising: ARGOM 2 A, BERCR 1 A, BERCR 5 A, BPM 2 A2, BPMO 2007-2 A2, CASTO 1 A, CLARF 2007 A, CORDR 2 A2, CORDR 3 A2, CORDR 4 A2, FEMO 05 A, FEMO 1 A1, FGOLD 1 A2 and VELAH 3 A. Only BPM 2 A2 has covered on PriceABS in the past three months - at 99.332 on 3 November.

Secondary markets

US CLOs trundle on

The US CLO secondary market continues to trundle on in a positive manner albeit without a resurgence in activity.

"It's stayed quieter this week and certainly any expectation of a post-Trump victory sell-off hasn't materialised," says one trader. "People are looking for volatility before they act, but for now there's none in the CLO space."

Indeed, the trader continues: "I think things will keep going as they are. Given how tight we are any dip will get bought and that combined with how much cash there is out there still to be put to work means it's most likely we'll continue to drift sideways or steadily edge up."

Activity levels will continue to be low as participants remain distracted by primary, the trader suggests. "New issues, refis and resets are still the name of the game and with plentiful supply there there's no need or desire to chase paper in secondary."

There are four BWICs on the US CLO calendar for today, so far. Only one remains - a single $3.25m line of HARV6 6A B due at 12:00 New York time. The single-A tranche has not appeared on PriceABS in the past three months.

ABS

Container ABS decline persists

Container ABS volumes have continued to fall in Q3. This follows sluggish demand for containers, which has provided headwinds for the sector through 2016.

Container ABS outstandings have fallen to around US$4.8bn, down by nearly US$2.5bn since the end of 2013, according to Wells Fargo figures. Structured product analysts at the bank attribute the decline to a lack of primary issuance, called deals and amortisation.

Spreads on container ABS have also widened approximately 40bp year-to-date to about 290bp currently, but have tightened about 110bp since the wides seen in mid-March this year.

Nevertheless, the Wells Fargo analysts note that despite lower lease rates and box prices, the container leasing market has continued to stabilise as inventory levels reach multi-year lows and net production slows to the lowest levels since 2009. New box prices have increased for the past two quarters for the first time since 2Q12, with yields on new containers having also increased, some to the highest level in nearly four years.

Dry box production, however, is down 45%-50% from 2015-2016 levels, with production averaging about three million TEU over the last six years. The analysts suggest that strong average utilisation rates - currently at 93.7% - could increase as disposal volume remains high, order volume remains low and Hanjin-leased containers are returned and placed back on lease.

Equally, public container lessors report that roughly 80%-85% of their fleets are on longer-term finance leases and a maximum of 8%-16% of the leases are set to expire in any one year. The Hanjin Shipping bankruptcy caused several disruptions in the market, despite final recovery rates for Hanjin-leased containers of 90% for public lessors. As such, average portfolio per diems may decline further as these containers are re-leased at rates closer to the natural markets.

It seems that early 2016 may have been the bottom of the cycle, however, as positive signs in Q2 and Q3 have provided optimism for container lessors into 2017. But several headwinds persist, including projections of container trade growth in 2017 of only 1.1x multiple of global GDP; new 20-foot dry box prices up only 3.2% year-on-year, with steel higher by 25%; and shipping line health being a general concern, with container ordering with public lessor capex in 2016 potentially only around 70% of the 2015 level. These factors increase the risk of lower revenue on ABS deals.

However, there are positive indications for lessors, including net production being close to zero in 2016 (the lowest since 2009), new dry box prices up another US$150 over the quarter to around US$1600 currently and dry factory inventory being at the lowest level in nearly five years.

Looking ahead to 2017, four main themes will be important for the container ABS sector, according to the analysts. The first is that of self-correcting markets, with year-on-year container fleet growth expectations of 1.2% for 2016, below the Clarksons projected container trade growth of 3.3%. The second is increasing box prices, which have risen in the last two quarters.

The third concern for 2017 is that shipping lines continue to face depressed freight rates, with an overcapacity of ships and possibly higher costs-of-capital due to counterparty risks, although the analysts suggest ongoing consolidation in the industry is a good sign. The final theme is the continued shrinking of the container ABS market.

Only one container deal was issued this year, for approximately US$140m. In comparison, gross issuance (ex-amortisation) was around US$500m in 2015 - including two less traditional structured deals - and nearly US$3.2bn in 2014.

RB

Structured Finance

SCI Start the Week - 14 November

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

Upcoming SCI event
Panellists are being finalised for SCI's latest Capital Relief Trades Seminar, 'Navigating the Cash vs Synthetic Debate, Weighing the Cost of Capital', which is being held on 22 November in London. Please email for a conference registration code or click here and follow the link to register.

The conference programme consists of a series of panel debates, focusing on the structural landscape, the cost of capital and alternatives, and issuing bank strategies among others. So far, speakers include representatives from: Apollo Management; Caplantic; Chorus Capital Management; Christofferson Robb; Clifford Chance; EIF; Lloyds; Magnetar; Mariner Investment Group; Mizuho; Nomura; Nordea; Open Source Investor Services; and Rabobank.

Pipeline
The rate of pipeline additions last week was fairly consistent with the one before, although with less emphasis on CMBS. In all there were seven new ABS, two ILS, five RMBS and two CMBS added.

The ABS were: US$1bn Drive Auto Receivables Trust 2016-C; €725.7m Lusitano SME 3; CNY3bn Shanghe 2016-1 Retail Auto Mortgage Loan Securitization Trust; €1.335bn Sunrise 2016-2; US$814.385m TSASC Series 2017A and 2017B; and US$1.4bn Verizon Owner Trust 2016-2.

US$200m Bonanza Re 2016-1 and US$300m Ursa Re 2016-1 were the ILS, while the RMBS were US$460m Freddie Mac Whole Loan Securities Trust Series 2016-SC02, A$747m Kingfisher Trust 2016-1, US$353.68m Shellpoint Co-Originator Trust 2016-1, US$300m SPS Servicer Advance Receivables Trust Series 2016-T1 and US$300m SPS Servicer Advance Receivables Trust Series 2016-T2. The CMBS were US$1bn GSMS 2016-GS4 and US$750m Hilton USA Trust 2016-HHV.

Pricings
The week's prints were skewed towards CLOs, bolstered by a number of refis. In total there were three ABS, four RMBS, one CMBS and 14 CLOs.

US$150m Diamond Resorts Owner Trust 2016-1, £475m E-CARAT 7 and C$426m GMF Canada Leasing Trust Series 2016-1 accounted for the ABS, while the RMBS were £2.552bn Brass No.5, US$187.9m Colony American Finance 2016-2, A$200m Sapphire XV Series Trust 2016-2 and £448m Towd Point 2016-Granite 2. The CMBS was US$452.3m CLMT 2016-CLNE.

The CLOs were: US$560.7m Anchorage Capital CLO 9; US$937.35m Dryden Senior Loan Fund 2014-33R; US$462m Galaxy CLO 2012-14R; €364m GLG Euro II; US$425m GoldenTree Loan Opportunities 2015-11R; US$300m LMREC 2016-CRE2; US$402.7m MidOcean Credit CLO 2016-6; US$309m Mountain View 2016-1; US$459.5m Neuberger Berman CLO 2014-18R; NorthStar 2016-1; US$367.2m OCP CLO 2012-2R; US$605.5m Octagon XXI CLO 2014-1R; US$498m Race Point CLO 2012-7R; and US$282.4m Saratoga Investment Corp 2013-1R.

Editor's picks
Transfer pricing: 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...
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...
Uncertain intentions: 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...
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..."
External mandates: Since AIFMD came into force, institutions have interpreted the requirement for the 'proper and independent' valuations of an alternative investment fund's assets in different ways. The majority carry out the valuation process internally and employ a third-party valuation agent in an advisory capacity. However, there are certain sectors of the market that may be increasingly likely to outsource valuations to an external valuer...

Deal news
• 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.
• 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).
• 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.
• 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.

Regulatory update
• 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.
• 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.
• 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.

Structured Finance

'Transformational' capital offered

TCA Fund Management Group has closed the first investment made by its new fund. Touted as a hybrid opportunity fund, it features an innovative combination of private equity and credit characteristics.

The idea behind the new fund is to take a big credit approach to the small cap space, according to TCA Fund Management Group ceo Bob Press. "Fund investments sit in a company's capital structure like equity, but look like a loan," he explains. "They are structured as a series of preference shares that are redeemable over time and are contingent on the company hitting certain performance thresholds. The first deal with a term sheet has four funding mechanisms that are tied to different business lines and redemption timelines."

He continues: "It is a bespoke structured product with covenants - essentially debt masquerading as equity. This means the company can book the investment as equity while benefitting from an approach that has a credit background. At the same time, our investors are attracted by the dividends, short-duration, transparency and diversification on offer."

The fund, which is the firm's second, targets a 20%-25% return based on a combination of continual cashflow and the ultimate exit event. Press describes the product as "a finite opportunity": it is anticipated to grow to US$300m-US$400m, with the aim of helping 25 to 35 companies in need of "transformational capital".

He adds that TCA has a hands-on approach and will provide a director for every investment. "The lines between investment banking, corporate advisory, structured finance and debt/equity blur when dealing with small businesses. They need many different things - money is only a part of the solution."

TCA's first fund - dubbed Global Master Credit Fund - was launched in 2010 and invests US$1m-US$5m clips in companies with up to a US$25m turnover, taking fixed and floating charges over the assets. The new opportunity fund targets companies that are the next rung up - with turnovers of US$25m-US$100m - but remain underserved.

"Many companies come to us having previously done merchant cash advance loans or received P2P funding," Press observes. "There has been a rapid adoption of online financing. The market is moving away from bricks-and-mortar lending and we're now dealing with underwriting adapted to take this into account."

The firm is currently working on the new fund's second investment. "The size of what we're doing, the scope of the underserved market and the firepower of the people working for us is an attractive proposition," Press concludes.

CS

Structured Finance

Disruptive opportunities

Bijesh Amin, co-founder of Indus Valley Partners, discusses the emerging high-frequency lending model and its impact on structured credit

Alternative asset managers see scope for investment opportunities in structured credit resulting from post-crisis regulatory changes, combined with the emergence of disruptive technologies, such as big data, P2P and AI. However, caveat emptor remains.

Hedge funds trading structured credit asset classes, such as MBS and ABS, are utilising disruptive technologies to take advantage of opportunities in the sector as a result of the 2008 credit crisis. Disruptive technologies - including AI, machine learning and big data - offer the scope for hedge funds to analyse, acquire and bundle the cashflows from a variety of asset classes at a scale that was previously unobtainable without the large securitisation platforms at investment banks.

Over and above recreating 'old' securitisation models, these technologies also offer the scope for creating entirely new structured credit products, as a result of big data and the emergence of new funding platforms. Underlined by the regulatory limits imposed on traditional providers of asset funding, such as credit card companies, mortgage companies and banks, these technologies could herald the arrival of a new set of fintech players into the marketplace.

Big data is not only about processing vast amounts of data, but also about how to manage unstructured, uncorrelated and 'noisy' data (for example, text, speech and images). Using these technologies, structured credit traders may have an edge in finding investable patterns in asset cashflows or signals in market data or in predicting outcomes from uncorrelated data. Typical traditional analytical models - for instance, in prepayment risks or defaults - are based on purely historical correlations.

In a related area, P2P lending platforms have emerged as credible sources of funding and are receiving close attention from several hedge funds and even banks. The emergence of a hedge fund-to-P2P-lending model, or as some have coined it a 'high-frequency' lending model, offers an intriguing possibility for a new era of securitised products. But is also poses risks.

There is a clear parallel in the pre-2008 era, when investment banks bought mortgages from mortgage origination companies or the origination companies themselves as 'fuel' for their securitisation engines to churn out products for yield-hungry investors. This model is to some extent being recreated from ground up, with hedge funds connecting directly to P2P platforms for the 'fuel' and then creating a new set of securitised products that can take a 6% unleveraged return and turn it into a 12% or 18% return.

However, the P2P lenders are not mature financial institutions and do not possess strong underwriting platforms or credible ratings from the big three rating agencies. In light of this, a fintech-enabled repeat of the subprime crisis is not something the economy needs right now. Caveat emptor.

Structured Finance

REIT engagement requested

RAIT Financial Trust has responded to an amended Schedule 13D filed last week by Highland Capital Management, which alleges that the REIT has repeatedly declined to engage with it regarding proposals to unlock substantial value for shareholders. At issue is Highland affiliate NexPoint Real Estate Advisors and Nexbank Capital's expression of interest in pursuing a transaction with RAIT.

The NexPoint proposal to unlock shareholder value focuses on five strategic themes: simplifying RAIT's business; deleveraging; reducing operating costs by at least 50% through externalising management to NexPoint; creating enhanced management alignment with shareholders via a US$30m equity infusion; and harvesting value from Independence Realty Trust (IRT). Among other points, the filing argues that while the recent internalisation of IRT may be a positive development for IRT's shareholders, its execution was not in the best interests of RAIT's shareholders.

"We continue to believe our proposal represents a unique opportunity to create compelling and certain value for RAIT's shareholders, and the company will be better positioned to provide an enhanced value proposition going forward," the filing states. "As your second largest non-index shareholder, it is our hope that you will engage in substantive discussions, given our reiterated interest and enthusiasm around the potential value creation."

It asks that a RAIT board member, advisor or other designee contact NexPoint Real Estate cio Matt McGraner to discuss the proposal at their earliest convenience.

RAIT responded by stating that it "strives to maintain constructive, ongoing communications with all of its shareholders and values constructive input from all shareholders on RAIT's strategy, performance and plans for creating long-term shareholder value". The REIT stresses that it is committed to acting in the best interests of all shareholders and that its board of trustees and management are confident that they are pursuing the right strategy to enhance value for all shareholders. It adds that it will continue to take actions that will enable RAIT to build long-term shareholder value for all shareholders.

Additionally, RAIT points to the actions it has undertaken over the past 60 days that are intended to facilitate its ability to transition to a more focused and simpler business model, deleverage and generate enhanced returns for its shareholders (SCI passim). It notes that these initiatives were in the process of being executed well before Highland Capital's initial Schedule 13D filing on 7 October 2016.

Structured Finance

CLO duo promoted

Oaktree Capital has promoted James Turner and Madeleine Jones to jointly lead the European credit team. This comes after Shannon Ward announced her departure to take up a new role in Los Angeles, although she will stay on for a period to ensure a smooth transition.

Turner has been with Oaktree since 2001 and was previously co-portfolio manager for Oaktree's European high yield and global high yield strategies. He will continue in a portfolio management role for both strategies and will now cover Oaktree's European senior loan strategy as co-portfolio manager for European senior loans and assistant portfolio manager of Oaktree's CLOs.

Jones has been with Oaktree since 2003 and has worked on the management of Oaktree's European senior loan business in particular. She now becomes assistant portfolio manager of European high yield, co-portfolio manager of European senior loan strategy and portfolio manager of CLOs at the firm.

Structured Finance

Accounting method queried

Fifth Street Asset Management (FSAM) has postponed the filing of its Form 10Q and related earnings call for the quarter ended 30 September 2016. The move is related to the company's decision to revisit the accounting method previously used for its common stock ownership of Fifth Street Finance Corp (FSC) and Fifth Street Senior Floating Rate Corp (FSFR), the publicly-traded BDCs it advises.

During the course of 2016, FSAM says it made substantial purchases of common stock shares of FSC and FSFR, causing the company to re-evaluate whether the equity method of accounting is appropriate versus its current accounting for these investments as available-for-sale securities. The company believes that any potential changes to the accounting method for its investments in FSC and FSFR will have no impact on pro forma adjusted net income for the current or prior periods in 2016. The ongoing accounting method consideration at FSAM will also have no impact on either FSC or FSFR, it adds.

The company has filed a notification of extension on Form 12b-25 with the US SEC and says it is "working diligently" to complete and file the 10Q within the five-day period provided.

Structured Finance

Investment firm adds advisors

Strategic Value Partners has added Goran Puljic and David Weaver to its advisory council. Puljic was previously a partner at Oak Hill Advisors, while Weaver was chairman and ceo of Jefferies International.

Puljic has 30 years of experience in financial services, mainly in CLOs and structured products. He was co-head of Oak Hill's corporate structured products group until stepping down earlier this year.

Puljic previously founded and ran the structured products investment department in Lehman Brothers' private equity group. He has also held various structured products roles at Goldman Sachs and began his career with Morgan Stanley, Westpac and Lehman Brothers.

CLOs

CLO vet poached

Nassau Re has hired Alex Jackson as md for bank loan portfolio management. In his new role, he will be focused on building out the firm's CLO management and bank loan investment portfolios.

Prior to Nassau Re, Jackson headed Insight Investments' bank loans team in affiliation with Cutwater Asset Management and BNY Mellon. Before joining Cutwater in 2013, he was deputy cio and CLO portfolio manager at CIFC.

Insurance-linked securities

Reinsurance pro brought in

TigerRisk Partners has appointed reinsurance industry veteran Patrick Denzer as partner, with a particular focus on client management and strategic development. He was most recently Americas chairman at Guy Carpenter and has also served as ceo of John B Collins Associates, where he began his career with a focus on property catastrophe reinsurance and was involved in the development of the firm's ILW business.

Risk Management

Margin initiative chief replaced

ISDA has appointed Tara Kruse as head of its working group of margining requirements initiative. She replaces Mary Johannes, who is leaving ISDA for other opportunities.

Kruse was previously co-head of data, reporting and FpML for ISDA and will now work on preparations for the variation margin 'big bang' on 1 March 2017 and the extension of initial margin requirements to phase-two entities in September 2017. She will also oversee updates to the ISDA Standard Initial Margin Model (ISDA SIMM) and the management of the ISDA SIMM governance framework.

ISDA's deputy ceo George Handjinicolaou is also leaving ISDA at the end of the year. He will concentrate on his new role as chairman of Piraeus Bank.

Risk Management

Markit Analytics leader appointed

IHS Markit has appointed Andrew Aziz as global head of Markit Analytics. He has two decades of experience in fintech and was most recently at IBM.

Aziz will be responsible for leading the business, product and research and development functions at Markit Analytics. At IBM he led strategy, quantitative analytics and research for the risk analytics division, and he has also held senior positions at Algorithmics.

IHS Markit recently announced its solution for meeting the Fundamental Review of the Trading Book (FRTB) standards published by the Basel Committee (SCI 25 May). The Markit Analytics Risk Engine is a key component.

Risk Management

APAC head appointed

ICAP has named Guy Rowcliffe, ceo of RESET, as head of Asia Pacific for its Post Trade Risk and Information Services (PTRI) business. In this newly created role, he will be responsible for Asia Pacific regional strategy and represent the company among regulators, industry bodies and committees. He will continue in his role as RESET ceo, reporting to Jenny Knott, ceo of ICAP's PTRI division.

Rowcliffe has over 20 years of experience in post-trade services and within interest rate derivatives markets in both Asia and London. He joined ICAP following the acquisition of Switchfix in 2008, which was later rebranded to RESET, an ICAP PTRI business.

ABS

Cali tax vote 'ABS negative'

The passing of California's Proposition 56 - which will increase the state's tobacco tax rate from 87 cents to US$2.87 on a packet of cigarettes - is credit negative for tobacco settlement bonds, says Moody's. The tax increase goes into effect in April 2017.

Moody's notes that national cigarette consumption declined 9.2% in the year following the federal excise tax increase from 39 cents to US$1.01 per pack in 2009. It then decreased a further 6.4% in the following year. These decreases exceeded the long-term annual average decline of 3%-4%, underlining the extent to which price changes affect consumer demand.

"Assuming California consumption in 2017 decreases by a similar rate as the national decline in 2009, the effect of California's higher excise tax would add more than 50bp of decline to nationwide consumption in 2017," notes Moody's. Any declines in consumption will reduce cashflow available to service tobacco bonds, thus leading to ABS paying down more slowly than originally anticipated.

ABS

Overcollateralisation errors identified

Moody's has affirmed the ratings of six tranches from two student loan ABS sponsored by Darien Rowayton Bank (DRB). The action follows the identification of a deficiency in the initial overcollateralisation amount of certain classes of notes and an error in the trustee reports regarding the calculation of overcollateralisation target amounts.

The effected tranches are the class A1, A2 and A3 notes issued by DRB Prime Student Loan Trust 2016-A and 2016-B. An analysis of the transactions showed that the overcollateralisation amount of the class A3 notes of both deals were lower than that stated by the trust indenture by 10.1% and 1.4% respectively. The overcollateralisation amounts for the class A1 and A2 notes in both transactions closed at or above the trust indenture amounts, however.

For both the DRB 2016-A and DRB 2016-B transactions, each class of notes is backed by a discrete pool of loans that are, in effect, cross-collateralised at the bottom of the cashflow allocation waterfall. Once the class A1 and A2 notes hit their target overcollateralisation amounts, any class A3 overcollateralisation deficiencies may be addressed with excess cashflows.

Moody's notes that in the case of the 2016-A transaction, all three classes of notes have reached their target overcollateralisation amounts. In the case of the 2016-B transaction, the agency expects the class A3 notes to reach the target overcollateralisation amount over the next few months.

Separately, the error in the trustee reports resulted in the slight overstatement of the overcollateralisation amounts. For DRB 2016-A, past payments to the notes were affected, but the difference was positive to the notes and not material to the ratings given the low dollar amount at stake. For DRB 2016-B, neither the ratings on the notes nor past payments are affected because the transaction is still in the lock-out period, during which time the overcollateralisation target amounts do not affect the allocation of payments.

The trustee is expected to correct the calculation of the overcollateralisation target amounts in both deals and adjust the next payments in DRB 2016-A to correct past misallocations.

ABS

Euro tranche debuts

FirstRand Bank is in the market with its latest UK auto ABS, Turbo Finance 7. The deal, which is provisionally sized at £405m, includes a euro-denominated tranche - a first for the programme.

Provisionally rated by Moody's and S&P, the transaction comprises: Aaa/AAA rated 1.7-year class A1 and class A2 (euro-denominated) notes; A2/A 3.6-year class Bs; Baa3/A- class Cs; and unrated class Ds and Es. The fixed-rate classes C through E are expected to be retained.

Rabobank credit analysts note that the A1 and A2 tranches will rank equally. The currency swap provider is Wells Fargo.

The loans have been originated under FirstRand's MotoNovo Finance label. The deal will be revolving for six months, with the pool comprising 62,629 loans, 86.6% of which are hire purchase agreements for used cars (83.2%). Seasoning averages nearly one year, while the remaining term is 3.4 years.

The roadshow for the deal begins today (17 November) in London, before moving to Europe tomorrow and early next week.

ABS

Virgin handset deal closed

Royal Bank of Canada has arranged a £125m mobile handset securitisation programme for Virgin Media Mobile, the first of its kind in Europe. The underlying receivables consist of loans provided by Virgin Media Mobile to its customers in order to finance the purchase of handsets from Virgin Mobile Telecoms.

Allen & Overy advised RBC as arranger on the transaction, with a team led by London finance partner Tim Conduit. "This deal proves the concept of mobile phone securitisation in Europe, which we've already seen in the US, and opens the door to other providers," he comments.

Conduit continues: "It's the next logical step in the consumer finance securitisation market. Investors will also welcome a new product, particularly as it provides access to a mature market with a diversification of users."

ABS

Auto ABS restructured

Italian auto loan ABS A-Best 14 - which closed on 11 May (see SCI's new issuance database) - has been restructured. The amendments include the retranching of the principal amount of all classes of notes, increasing the total issuance volume and portfolio size, and changing the fixed interest rates of the class B, C and D notes. The balance standing to the credit of the cash reserve and the commingling reserve has also increased in line with the portfolio upsize.

The restructuring process was initiated with an amendment to the transfer agreement signed on 29 June. The amendment included a reduction of the flat discount rate to 4.34% from 7% for the initial portfolio and the inclusion of a mechanism, whereby the discount rate of each subsequent portfolio transferred during the revolving period will be equal to its weighted average nominal interest rate, providing the weighted-average discount rate of the overall portfolio after the purchase of the subsequent portfolio is at least equal to 3.5%.

Following the amendments, the net present value of the initial portfolio has increased to €997m from €950m, with the difference being treated as a deferred purchase price that was paid by the issuer to sponsor FCA Bank on the retranching date. The portfolio has been further increased to a total of €1.097bn, funded by a portion of the additional note issuance.

Fitch notes that the new capital structure led to a change in note credit enhancement (CE). CE for class A, B, C and D is 17.7%, 13.1%, 9.2% and 6.2%, compared with 14.9%, 8.9%, 5.9% and 3.4% respectively at closing. Initial excess spread over senior expenses and fixed interest on the notes has dropped to about 1.3% from 4.7% per year.

The agency has affirmed its ratings on the notes, but downgraded the commingling reserve facility.

ABS

Navient bonds extended

Navient has amended the transaction agreements for Navient Trust 2014-8, totalling US$469m of FFELP student loan ABS bonds. The legal final maturity of the deal's A3 tranche has been extended to 2049. The legal final maturity dates on US$7.8bn of bonds from Navient-sponsored FFELP securitisations have been extended since December 2015.

ABS

First prime HUNT ABS of the year

Huntington National Bank is in the market with its first prime retail auto ABS issuance of 2016. The US$1.5bn Huntington Auto Trust 2016-1 auto loan ABS is Huntington's eighth standalone retail term securitisation.

The assets in the deal consist of prime quality retail instalment auto loan contracts, backed by cars, sports utility vehicles and light-duty trucks, all originated by Huntington. The collateral has a weighted average FICO score of 765 and weighted average LTV of 91%, which is consistent with previous Huntington ABS.

At US$750m, Huntington's previous deal - Huntington Auto Trust 2015-1 - was half the size of its latest transaction (see SCI deal database).

Structured Finance

Mutual fund launched

Palmer Square Capital Management has rolled out its ultra-short duration investment grade strategy in a mutual fund format. The new offering is dubbed Palmer Square Ultra-Short Duration Investment Grade Fund.

Christopher Long, president of Palmer Square Capital Management, comments: "Given the lack of true ultra-short duration funds, as well as the changes which have occurred with money market funds, we have had demand from our investors to access our ultra-short duration strategy in mutual fund format. We believe that the fund offers investors a unique alternative to traditional shorter-duration investments in that our strategy seeks low interest rate sensitivity and low spread duration, yet it offers investors an attractive relative yield and a diversified source of income."

The fund will primarily invest in high quality, short-dated corporate bonds, loans, traditional ABS and structured credit (mainly CLOs).

Structured Finance

Counterparty replacement warning

Pending derivative regulations including swap margin posting requirements are creating uncertainties for both new and existing structured finance transactions, notes Fitch. Scheduled to go into effect in March 2017, the new rules require daily posting of two-way variation margin on affected derivatives.

While new swaps executed after 1 March 2017 would clearly be affected, Fitch's interpretation of the current proposals is that in the event of a replacement of a derivative counterparty in an existing transaction, the consequent contractual agreement between issuer and replacing derivative counterparty would have to obey two-way daily variation margining. In the agency's view, this aspect has the potential to create a significant barrier to the ability of transaction parties to find suitable replacement entities on equivalent economic terms.

SFIG has previously requested and received a 'no action position' from the US CFTC for certain commission regulations applicable to swaps with legacy SPVs. Given the nature of this no-action position, Fitch suggests that it is conceivable that it will be extended to the two-way margin posting requirements as well.

Structured Finance

UK inflation to affect ABS, RMBS

Brexit-driven inflation in the UK will be credit negative for securitisations backed by mortgages, auto loans and other consumer debt, primarily through an increase in defaults among low income borrowers, warns Moody's. These borrowers will be less able to absorb the higher costs resulting from the decision to leave the EU.

The rating agency notes that the UK is reliant on imports, so sterling's 13% depreciation against the euro since the Brexit vote will drive up inflation, reducing borrowers' disposable income. Inflation effects will differ by asset class, although buy-to-let RMBS is expected to be most affected.

Moody's expects UK inflation to reach 1.5% by year-end 2016 and 2.6% in 2017. Cumulatively, this would amount to a more than 4% increase in inflation since the beginning of 2016.

Under a scenario where the price of basic goods increases 15%, the disposable income for multi-income families of the lowest income quintile would fall by 8%, says Moody's - compared with approximately 5% for the following two quintiles and 4% for the highest two quintiles. This impact would be exacerbated for single income families.

Credit card, store card and consumer loan debt targeted to low income borrowers would be particularly at risk of increased default probability. Auto loan ABS and non-conforming RMBS are less at risk of default, given their secured nature.

For non-conforming RMBS rated by Moody's, 15% cumulative inflation translates into a 4% increase in defaults. However, among borrowers in the lowest income quintile, defaults increase by 20% - while the impact on the highest two quintiles is negligible, at around 2%. As for auto loan ABS, 15% inflation translates into a 22% increase in defaults, with more than half of the lowest income borrowers defaulting.

The UK BTL market is particularly susceptible to inflation risks outside south east England. Away from London and the south east, the rental market has large exposures to low income borrowers.

"Therefore, we expect high inflation to lead to an increase in arrears of rents or downsizing to lower rent properties (therefore increasing vacancy rates) and a decline in rents," says Moody's. "However, BTL transactions we rate have low exposures to areas in which borrowers spend the highest portion of their income on rent, mitigating some of those risks."

Structured Finance

Green bond tool readied

S&P has published an updated outline of its green bond evaluation framework, following the conclusion of a consultation period on the proposal. Following further testing and calibration of the framework, the agency anticipates launching green bond evaluations in 1Q17.

S&P's green bond evaluation tool would provide a second opinion under the Green Bond Principles and a relative green impact score on capital market instruments targeted at financing environmentally-beneficial projects. The proposed framework evaluates the governance and transparency of the bond and provides an analysis of the environmental impact of the projects financed by the bond's proceeds over their lifetime, relative to a local baseline.

When evaluating environmental impact, the approach would consider both climate change mitigation and adaptation projects. Mitigation projects aim to bring environmental benefits and target areas of concern, while adaptation projects aim to take practical steps towards reducing the exposure to and managing the impacts of natural catastrophes.

The calculation for mitigation projects considers a range of quantifiable environmental impacts, termed environmental key performance indicators (eKPIs), such as carbon dioxide, water and waste.

The proposed approach would evaluate a bond financing against three scores: a transparency score, a governance score and a mitigation and/or adaptation score. The resulting scores would be weighted and amalgamated into an overall final green bond evaluation.

Structured Finance

Default guidelines consultation announced

The EBA has launched a consultation on its draft guidelines on the estimates of risk parameters for non-defaulted exposures, namely of the probability of default (PD) and the loss given default (LGD), and on the treatment of defaulted assets. The consultation runs until 10 February 2017.

More specifically, for non-defaulted exposures the draft guidelines detail the estimation of PD and LGD parameters, including specification of main definitions, requirements for the data used and clarifications on modelling techniques. In the case of defaulted assets, these guidelines clarify the estimation of risk parameters, such as best estimate of expected loss and LGD in-default, based on the requirements specified for the LGD for non-defaulted exposures.

The guidelines also specify other aspects common to all risk parameters, such as the judgement component when developing and applying internal models, the appropriate level of conservatism that should be included in risk parameters and the need for regular reviews of the models to ensure the necessary changes are applied in case of their deteriorated performance.

The guidelines may impact numerous rating systems and so they are expected to be implemented by the end of 2020.

Structured Finance

CRT line-up finalised

Panellists are being finalised for SCI's latest Capital Relief Trades Seminar, which is being held on 22 November in London. The event will be hosted by Reed Smith at its offices at 20 Primrose Street, EC2A 2RS.

As securitisation shifts from being used as a funding tool to a balance sheet and credit risk management tool, balance sheet relief trades (as distinct from capital relief trades) are gaining traction. SCI's Capital Relief Trades Seminar provides an in-depth exploration of this trend, focusing on a number of different RWA management techniques, as well as how to demonstrate significant risk transfer and an update on the latest assets and jurisdictions to emerge.

The conference programme consists of a series of panel debates, focusing on the structural landscape, the cost of capital and alternatives, and issuing bank strategies among others. So far, speakers include representatives from: Apollo Management; Caplantic; Chorus Capital Management; Christofferson Robb; Clifford Chance; Deloitte; EIF; Lloyds; Magnetar; Mariner Investment Group; Mizuho; Nomura; Nordea; Open Source Investor Services; Rabobank; Santander; StormHarbour; and UniCredit.

Please email for a conference registration code or click here and follow the link to register.

Structured Finance

CRA guidelines finalised

ESMA has published its final report on guidelines on credit rating agencies' methodologies. The guidelines clarify how rating agencies should validate and review their methodologies, increasing the quality of the quantitative measures used in the review process.

The guidelines will require rating agencies to review their methodologies in terms of: discriminatory power, covering their ability to rank rated entities in accordance to their future default status; predictive power, by comparing expected behaviour to observed results; and historical robustness, through assessments of other elements of the methodology such as the stability of the credit ratings assigned.

ESMA accepts there are challenges in validating methodologies with limited quantitative evidence, and so requires rating agencies to consider data enhancement techniques as well as techniques enabling them to perform quantitative measures for demonstrating the discriminatory power of their methodologies. ESMA expects agencies to demonstrate the robustness of their methodologies even where there is limited quantitative evidence.

ESMA considers implementing the guidelines will raise the overall standard of validation by rating agencies while allowing sufficient flexibility for them to choose the approaches that are the most relevant to their business, size and activity areas. The guidelines will be translated into the official languages of the EU and become effective two months after their publication on ESMA's website.

CMBS

Retail pushes delinquencies up

US CMBS delinquencies climbed by 7bp to 3.25% last month, as retail late-pays continue to increase, according to Fitch's latest index results for the sector. New delinquencies of US$789m exceeded total resolutions of US$535m, while portfolio run-off of US$7.6bn exceeded Fitch-rated new issuance volume of US$6.6bn across seven transactions, causing a decrease in the overall index denominator.

The agency notes that retail remains the slowest to improve among the major property types, with the highest delinquency rate. The 35bp up-tick in retail delinquencies last month was due to US$419m of new delinquencies significantly outpacing US$156m of resolutions.

Retail properties accounted for the second, third and fourth largest new delinquencies last month. The US$55m Kimco PNP - Cheyenne Commons (securitised in JPMCC 2006-LDP9), US$49m Hudson Valley Mall (CFCRE 2011-C1) and US$40m Tri City Plaza (CGCMT 2006-5) loans were already in special servicing (see SCI's CMBS loan events database), but became newly delinquent. The special servicer is expected to commence foreclosure action on the Kimco PNP - Cheyenne Commons property, while the Hudson Valley Mall loan became 60-days delinquent and the borrower defaulted on the Tri City Plaza loan.

Meanwhile, an office property accounted for the largest delinquency in October. The US$97.2m PPG Portfolio loan (MSCI 2006-HQ10) - which was already with the special servicer for imminent default, stemming from significant performance deterioration - defaulted at its maturity date.

By metropolitan statistical area (MSA), the largest delinquency concentration was in Washington-Arlington-Alexandria, DC-VA-MD-WV, which accounts for 23 delinquent loans totalling US$1.21bn and represents 10.2% of total outstanding delinquencies. Of the delinquencies in this MSA, over 82% are office properties.

Current and previous delinquency rates by property type are: 5.12% for retail (from 4.77% in September); 4.61% for office (from 4.68%); 4.20% for industrial (from 4.17%); 3.99% for mixed use (from 3.94%); 3.86% for hotel (from 3.88%); 0.79% for multifamily (from 0.79%); and 0.77% for other (from 0.75%).

CMBS

CMBS tools developed

DBRS has introduced commercial real estate Market Index and Market Rank tools for the US and Canada. They are offered as part of the DBRS CMBS reporting platform IReports.

DBRS notes that in times of economic stress, real estate capital availability contracts and may limit investment to more highly populated markets with greater liquidity and comparatively higher transparency. Defaulted loans in tertiary or rural markets will experience significantly higher losses because of a limited investor base and market inefficiencies. As such, market consideration is a factor in determining both probability of default and loss severity given default in the agency's modelling.

The agency says it recognises market liquidity by giving credit to loans that are located in dense urban locations and penalising loans on a sliding scale, as their markets become more sparsely populated, rural and/or illiquid. The DBRS Market Index therefore aims to differentiate between, for example, downtown urban core and the fringe.

Meanwhile, DBRS Market Rank incorporates population, economic data and CMBS origination activity, as well as market density within a given zip/postal code. The higher the market rank, the better the observed liquidity in the respective CRE market.

The seven market rank categories translate into inputs in the DBRS CMBS model, to address the fact that loss severity is higher in tertiary and rural markets (Market Rank 1 or 2), compared to primary urban markets (Market Rank 6 or 7).

CMBS

Exchangeable CMBS retention tested

Deutsche Bank and Citi are working together to bring another risk retention-compliant US CMBS to the market, just weeks before risk retention rules officially come into force. Unlike previous compliant CMBS, Kroll Bond Rating Agency notes this will be the first where a portion of the retained interests are expected to be assigned credit ratings if the sponsors exchange their initial retained certificates for exchangeable certificates.

The US$975m CD 2016-CD2 transaction (see SCI pipeline) follows a pair of risk retention-compliant deals from Morgan Stanley, Wells Fargo and Bank of America, including the recent MSCI 2016-BNK2. As the deal is being issued before the 24 December risk retention deadline (SCI passim), there is no legal obligation to comply with the coming regulation.

Deutsche and Citi are expected to exchange the initial issuance certificates for exchangeable certificates on the securitisation closing date. They are expected to purchase certificates that equate to 3.486% and 1.514% respectively of the initial pool balance to collectively satisfy the 5% vertical interest requirements.

Risk Management

Evaluation score introduced

Thomson Reuters has launched the Thomson Reuters Pricing Service Evaluation Score (TRPS Score), which aims to provide a measure of the level of incorporated market colour in any given TRPS evaluated price. Such information ranges from the level of available market data to the individual attributes of the issue, based on a measurement scale of 1 to 10, with 10 being the maximum score. Combined with in-depth access to pricing inputs and methodologies already offered by TRPS, the TRPS Score is designed to enhance insight into fair value measurement, helping customers defend TRPS evaluated prices and address stringent valuation and reporting requirements with greater confidence.

Risk Management

Call for clearing delay

ESMA has published a report on OTC derivatives central clearing, calling for a delay to the implementation of EMIR obligations for small financial counterparties. It argues that this is necessary because EU legislation is still being finalised, among other reasons.

The report proposes to amend EMIR's delegated regulations on the clearing obligation to prolong the phase-in period for financial counterparties with a limited volume of derivatives activity by two years. This would apply to firms classed in Category 3 under EMIR delegated regulations.

ESMA also proposes to align the three compliance dates for Category 3 firms in the delegated regulations regarding IRS and CDS. The new compliance date would be 21 June 2019.

RMBS

RMBS, re-REMIC criteria updated

Fitch has updated its criteria for analysing outstanding US RMBS and new and outstanding re-REMICs. The criteria revisions are not expected to have immediate rating implications for outstanding rated classes, although a revision to the time-specific payoff requirements for rating upgrades of recent vintages could lead to an increased number of rating upgrades over time.

The rating agency's updates are the result of a review of the methodology and criteria. Key revisions include the removal of a rating upgrade constraint for classes issued after 2009.

"Under the previous criteria, post-2009 classes could only be upgraded if they were expected to be paid in full within specified periods in an effort to increase rating certainty, even if they were otherwise passing rating stress scenarios above their current rating. This requirement was removed due to the strong performance of the recent vintages and to enhance consistency with the methodology used to rate new-issue bonds," says Fitch.

A minor revision was also made to the rating methodology for pass-through re-REMIC RMBS classes.

RMBS

Positive review after error

Fitch has placed 12 classes of notes issued by Salisbury 2015-1 on rating watch positive. The move reflects a model correction, which leads to a higher rating recovery rate (RRR) in the portfolio credit model (PCM) output.

The PCM used at closing did not correctly apply the market value decline, as specified by Fitch's UK RMBS criteria. The agency says the error is related to the 'region - postcode' mapping in PCM, which passed a postcode that is not recognised by Resi EMEA, its residential mortgage default model. As a result, the RRR produced by the PCM is lower than the correct approach.

The tranches affected by the action are classes C through N. Fitch will conduct an annual surveillance review to resolve the RWP, which may result in an upgrade by one or two notches.

RMBS

Dutch RMBS criteria tweaked

Fitch has updated its criteria addendum for Netherlands residential mortgage assumptions. The change is expected to negatively affect up to four existing RMBS ratings.

The addendum updates the maturity concentration test that Fitch applies to portfolios that comprise more than 20% interest-only loans maturing within a three-year period, and if the structure includes notes that are rated single-A minus or higher. It also provides further details of adjustments that the agency applies to base foreclosure frequencies to reflect certain borrower or loan-specific features.

Finally, Fitch has updated its market value decline assumptions to reflect house price movements observed up to end-2Q16. The changes of market value decline assumptions are not expected to impact any existing ratings, however.

RMBS

GSE issuance calendars released

Fannie Mae and Freddie Mac have released 2017 issuance calendars for the Connecticut Avenue Securities and Structured Agency Credit Risk programmes respectively. The first CAS credit risk transfer RMBS is scheduled to launch in early to mid-January, while the first STACR deal is scheduled for February.

Fannie Mae notes that during each issuance window, it has the option to issue - or to forego issuance - of a CAS deal. Laurel Davis, vp for credit risk transfer at the GSE, states: "In 2017, we expect to continue to be a benchmark issuer in the credit securities market. As we have demonstrated throughout the programme, our issuance volumes and utilisation of available windows continue to be dependent on market conditions."

In addition to the CAS programme, Fannie Mae will continue to bring additional private capital to the market through regular issuance of its Credit Risk Insurance Transfer (CIRT) platform. Through all of Fannie Mae's risk sharing programmes, the GSE has so far transferred a portion of the credit risk on approximately US$794bn in single-family mortgages.

Meanwhile, Freddie Mac plans to offer seven STACR transactions next year, from both its DNA and HQA series. Michael Reynolds, vp of credit risk transfer at the GSE, comments: "We will continue to focus on on-the-run collateral, as we did in 2016. We're committed to supporting the liquidity of STACR and plan to continue to enhance the programme to meet the needs of the market and investors worldwide."

Since 2013, the GSE has transferred a significant portion of credit risk on approximately US$580bn of UPB on single-family mortgages. It has grown its investor base to more than 200 unique investors, including insurers and reinsurers.

The announcements are part of an ongoing effort to ensure transparency in the market and help investors with their planning for next year.

RMBS

CIRT programme diversifies

Fannie Mae has completed its tenth Credit Insurance Risk Transfer (CIRT) transaction of 2016. For the first time since the programme's inception, the loan pool covered by the US$11.7bn CIRT 2016-9 deal consists of 15-year and 20-year fixed rate mortgages.

Fannie Mae says the transaction allows it to offer reinsurers a more diversified investment opportunity. "With CIRT 2016-9, we identified a new segment of loans for which risk-sharing was economical and that proved attractive to our risk-sharing reinsurer partners," comments Rob Schaefer, vp for credit enhancement strategy and management at the GSE. "By including 15-year and 20-year loans in the transaction, Fannie Mae has expanded the scope of our credit risk transfer programmes that help shift risk away from the company, reduce taxpayer risk and help create a safer, stronger housing finance system."

In CIRT 2016-9, Fannie Mae retains risk for the first 35bp of loss on the reference pool. If this US$41m retention layer were exhausted, reinsurers would cover the next 175bp of loss, up to a maximum coverage of approximately US$205m.

Coverage for these deals is provided based upon actual losses for a term of 7.5 years. Depending upon the paydown of the insured pool and the principal amount of insured loans that become seriously delinquent, the aggregate coverage amount may be reduced at the two-year anniversary and each anniversary of the effective date thereafter.

To date, Fannie Mae has acquired more than US$3bn of insurance coverage on over US$124bn of loans through the CIRT programme.