Contents

Structured Finance

Tip of the iceberg?

ABS impact investment to rise as green bonds gain traction

Securitisation is increasingly recognised as providing the 'double bottom-line' benefits sought by impact investors. Indeed, the number of impact investors allocating to ABS is expected to continue rising alongside issuers seeking to broaden their investor base, despite the election of reported climate change denier Donald Trump.

Impact investment is growing, with a number of bond funds - such as BlackRock and TIAA - recently introducing impact buckets. "Impact investing is a global phenomenon, although Europe is ahead of the US in terms of bringing the sector into the mainstream. We are optimistic that the capital markets are generally open to the extra work that goes into building products that have a double bottom-line - in other words, that provide financial benefits and a positive impact," says David Sand, chief investment strategist and chief impact investment officer at Community Capital Management.

He anticipates that funds with ABS capabilities will increasingly allocate to the segment, especially given the rise of the green bond movement, while ABS issuers are also likely to tap the market more in order to broaden their investor base. However, liquidity remains a significant hurdle.

"Many investors say they have a long time horizon, but they overwhelmingly allocate to liquid instruments and when they allocate to alternatives, they're looking for high risk-adjusted returns - which you don't see in impact investing. Equally, a growing number of investors in foundations and other categories are aware of the consequences of demanding liquidity and are considering putting some assets in illiquid vehicles without expecting huge premiums in return," observes Sand.

Michael Chan, cfo at Ygrene, welcomes the participation of impact investors in the securitisation market. He cites PACE as an example of the perfect model for "not only providing great cashflow to investors, but also truly helping consumers and the environment".

"I expect impact investor demand for ABS to increase - we're only at the tip of the iceberg in terms of potential appetite. However, the industry needs to work to educate investors about the sector, and then more will emerge," he confirms.

Rating agencies and green bond designations are playing their part. Ygrene's recent US$184m GoodGreen Trust 2016-1, for example, marked the first time a PACE ABS achieved a triple-A rating (Morningstar) on the class A notes.

Chan points to a number of drivers behind this development, including the diversity of Ygrene's PACE portfolio, which contains both residential and commercial assets from across California and Florida. Although KBRA rated the US$179.48m GoodGreen Trust 2016-1 class A notes double-A, he suggests that investors understand that the industry, over time, is likely heading towards rating PACE assets at the triple-A level and are happy to be paid a double-A yield on potentially higher rated secured assets.

Additionally, GoodGreen Trust 2016-1 received green bond designations from ICMA and Moody's, which Chan says helped to attract a wider investor base and enabled Ygrene to specifically target investors with buckets for capital deployed towards socio-economic and environmental projects. "We plan to seek both structured finance ratings and green bond designations for each public transaction we bring going forward," he confirms.

The term 'impact investment' has evolved over the last few years, according to Sand. "At Community Capital Management, we invest in market-rate opportunities that generate positive economic or social benefits. We define this as affordable home ownership, affordable rental housing and job creation, in addition to newer and innovative impact themes, such as sustainable agriculture, alternative energy, healthy living and addressing income inequality."

The firm manages US$2.3bn, mostly via a mutual fund, together with institutional separate accounts where it can be "more experimental and cutting-edge". A third of its portfolio is invested in taxable municipal bonds and the remainder is dependent on some form of securitisation.

The difference between what Community Capital Management, as an impact investor, invests in and a generic securitisation investor is that the firm looks at specific MBS pools and requests individual collateral components that allow it to target certain geographic (from a community economic development perspective) and affordability (borrower income and credit scores) criteria. "If you did a security run for our portfolio and those of other investors, the difference is that we know everything that is in our pool," Sand explains.

As well as single-family agency MBS, the firm invests in multifamily agency MBS - where affordability is built into the rents - and securitised small business loans under the SBA programme. Eligibility requirements for the latter segment include targeting the enterprise, government-supported and non-traditional lender categories.

"These lenders typically have capacity-constrained balance sheets and we try to figure out ways of creating opportunities by investing in the loans - with participation interests or pools, with or without credit enhancement and securitisation features," Sand observes.

Indeed, he adds that the impact investment sector isn't mature and so his firm is frequently in direct contact with potential issuers. "We are an asset manager and therefore can't provide credit enhancement, servicing or issuing capabilities. But we can be an advocate and work with issuers without size restrictions and without liquidity requirements."

Community Capital Management, for one, has a proprietary database for financial and impact tracking and reporting. "The mortgage market has changed dramatically in the last eight years: we used to be able to source loans from banks and mortgage companies, but now we deal with banks that have purchased whole loans from the GSEs," Sand explains. "They know what we're looking for in terms of geography, programme, coupon or issuer. The market runs on a calendar, so we know when our counterparties are creating pools, which typically occurs every two weeks or 30 days."

Meanwhile, the impact of the US election on impact investing remains unclear. Sand points out that socially responsible investment was expected to explode when Bill Clinton was elected president, but the ensuing focus on social change was channelled towards regulation and legislation rather than capital markets.

"We might see the opposite occurring under a Trump Administration. Those with an interest in addressing inequality or climate change may focus on the tools and resources available away from government, including investment allocations," he says.

He adds: "Nevertheless, Trump has talked about PPI and some of these projects might involve impact considerations. In any case, some climate change concerns aren't traditional liberal or conservative touch-points; how to address it has a different constituency."

Chan says he's not concerned by the election result and is confident that the PACE industry at least will remain well supported. "That PACE creates jobs, as well as helps finance energy efficiency improvements is hard to refute," he explains. "By reducing their energy bills, PACE also helps consumers, which in turn boosts the economy. It therefore checks three major boxes that are critical to both Democratic and Republican political mandates."

He confirms that Ygrene's PACE origination appetite and pipeline is robust. Together with its inaugural public securitisation from the new GoodGreen Trust shelf, the firm recently completed its second private securitisation - sized at US$145m - with strategic insurance partner Global Atlantic Financial Group.

"We plan to be a programmatic issuer - likely on a quarterly basis - and expect to tap the market again in 1Q17," Chan concludes.

CS

Secondary markets

Euro secondary surge

There is a surge in activity throughout the European securitisation secondary market.

Activity has picked up across the board following the US holiday last Thursday and this week is seeing a notable pick-up in BWICs either side of month-end. Until now the buying bias remains and spreads have held up in the majority of sectors. However, continuing concern around the Italian referendum is softening prices in the peripheral space.

There are currently four ABS/MBS BWICs on the European schedule for today. The most sizeable is an autos and Dutch prime mix due at 13:30 London time.

The €181.4m original face five line auction comprises: GLDR 2016-A A, SCGA 2016-1 A, SILVA 7 A, STORM 2016-1 A1 and VCL 23 A. None of the bonds has covered on PriceABS in the past three months.

Meanwhile, there are three BWICs on the European CLO calendar for today so far. The largest list in the sector is a four line €12.438m collection of single-As.

Due at 14:30 it consists of: ACLO 1X C, BABSE 2014-1X C, CGMSE 2015-1X B and SPAUL 4X B. Only CGMSE 2015-1X B has covered on PriceABS in the past three months - at 100.75 on 2 November.

Secondary markets

US CLOs pick-up

US CLO BWIC volumes are picking up post-Thanksgiving.

"We're seeing a spike in BWIC volume over the next few days, which isn't unusual after a long holiday-related gap in activity," says one trader. "Today primarily involves single-As and some double-As driven by a long list from a large insurance company testing the market; while tomorrow's highlight is a sizeable equity list involving tier 1 type names."

Given the limited amount of recent secondary market colour all results will be watched closely. However, the trader says: "There hasn't been too much movement in spreads lately with the market still distracted by refis and new issues and I don't think that will change too much in the coming days - secondary trading is likely to remain steady, people will pick their spots and no one will be looking to take on too much risk before year-end."

There are currently four BWICs on the US CLO calendar for today. The largest is the above mentioned single- and double-A list, which is due at 13:00 New York time.

It involves 52 line items totalling $96+m - ALM 2013-7RA B, ANCHC 2016-8A B1, ANCHC 2016-8A C, ATRM 10A B2, ATRM 10A C, BALLY 2013-1A C, BLUEM 2013-1A B, BLUEM 2013-2A B2, BLUEM 2013-2A C, BLUEM 2013-3A B2, BLUEM 2013-3A C, BLUEM 2016-1A B, BLUEM 2016-1A C, CECLO 2013-18A B2, CECLO 2013-18A C1, CGMS 2013-3A A2B, CIFC 2013-3A A2A, CIFC 2013-3A A2B, CIFC 2013-3A B, DRSLF 2013-30A C, EMNPK 2013-1A C1, GALL 2013-1A B2, GALL 2013-1A C, HLA 2013-2A B2, HLA 2013-2A C, JTWN 2013-2A A2B, KKR 14 A2, LCM 21A C, NEND 2013-1A C, NEUB 2013-14A B2, NEUB 2013-14A C, NEUB 2013-15A B2, NEUB 2013-15A C, OCT17 2013-1A C, OHALF 2013-1A C, RACEP 2013-8A B, REGT5 2014-1A A2A, SHSQR 2013-1A B1, SNDPT 2014-2A B, SNDPT 2014-2A C, SNDPT 2016-1A B2, SYMP 2013-12A B2, SYMP 2013-12A C, TPCLO 2013-1A B, VENTR 2013-14A B1, WINDR 2013-1A A2A, WINDR 2013-2A B2, WINDR 2013-2A C, WOODS 2012-9A B1, WOODS 2013-10A B1, WSTC 2013-1A A2B, and WSTC 2013-1A B.

Three of the bonds have covered with a price on PriceABS in the past three months - DRSLF 2013-30A C at L100H on 12 September; RACEP 2013-8A B at 100.03 on 3 November; and SHSQR 2013-1A B1 at 100.08 on 16 November.

Tomorrow's US CLO BWIC schedule already has four lists on it as well. The above mentioned equity list totals $68.8318m across eight line items.

Due at 10:00 tomorrow it consists of: APID 2015-21A SUB, CECLO 2015-24A SUB, CGMS 2015-3A SUBA, DRSLF 2015-40A SUB, MDPK 2014-12A SUB, MDPK 2014-13A SUB, OAKC 2015-11A SUB and OZLM 2015-13A SUB. Two of the bonds have covered with a price on PriceABS in the past three months - MDPK 2014-13A SUB at 71H on 18 October; and OZLM 2015-13A SUB at 80H on 27 October.

Secondary markets

Euro ABS/MBS distracted

New deals are continuing to keep focus way from the European ABS/MBS secondary market.

"Primary is still distracting most players, with a couple of new deals in particular drawing most attention right now," says one trader. "The Red & Black autos deal is pretty straightforward, but the next Towd Point issue is more complex and it's taking a bit of time for people to fully understand the credit and get comfortable with it."

Nevertheless, sentiment remains positive, the trader reports. "The last couple of new issues have priced at decent levels and secondary tone still appears strong. But overall there just doesn't feel like there's much really going on in secondary at the moment."

There is one BWIC on the European ABS/MBS schedule for today so far. Due at 15:00 London time it involves seven lines of euro- and sterling-denominated CMBS.

The 2.322m list comprises: BLNDLN 0 10/05/23, BUMF 5 A1, DECO 2007-C4X A2, ECLIP 2007-2X A, ESTON 2006-1 B, ESTON 2006-1 C and TAURS 2014-UK1 A. Two of the bonds have covered on PriceABS in the past three months - ECLIP 2007-2X A at 99.03 on 9 November; and ESTON 2006-1 B at 99.08 on 17 November.

Secondary markets

US CLOs keep busy

The busy end to November has continued into December for the US CLO secondary market.

"Secondary is a little busier than it has been," says one trader. "Trading desks have had a very good year and are now looking to position themselves for next year."

This week's pick-up in secondary volumes is being assisted by a couple of additional factors, the trader adds. "Secondary is making up for what has been a quieter month because of two holiday-shortened weeks and the flood of new issuance, though we've had some heavy BWIC days despite that. At the same time, this week there's been a little bit of a slowdown in the number of refis and new issues, albeit from very, very high levels."

Despite strong supply, secondary spreads remain solid. "Demand is still there and I don't see that changing especially now we're in a rising rate environment," the trader says. "Nor do I expect the primary slowdown to last, the New Year will likely see refi and new issuance pick up again barring any unforeseen macro events."

There are eight BWICs on the US CLO calendar for today so far. The chunkiest of those remaining is a four line $27.5m list due at 14:30 New York time.

The double-A auction comprises: ICG 2014-1A A2, INGIM 2013-3A A2, OCP 2014-7A A2A and VENTR 2014-16A A2L. Only ICG 2014-1A A2 has covered on PriceABS in the past three months - at 99.02 on 26 September.

Structured Finance

SCI Start the Week - 28 November

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

Pipeline
With the week dominated by Thanksgiving, there were few pipeline additions. These amounted to three ABS, an ILS, an RMBS, two CMBS and a CLO.

CNY4bn Bavarian Sky China 2016-2 Trust, US$709m Labrador Aviation Finance 2016 and Red & Black Auto Lease Germany 2 accounted for the ABS. The ILS was €180m Horse Capital I and the RMBS was Hypenn RMBS VI.

The CMBS consisted of US$555m Morgan Stanley Capital Citigroup Trust 2016-SNR and US$280.75m SCF RC Funding I and II Series 2016-1. The sole CLO was US$410.4m HPS Loan Management 10-2016.

Pricings
The number of prints was actually fairly consistent, with the exception of CLOs which dropped from 10 in the week before to just two last week. The final count showed six ABS, an ILS, six RMBS, four CMBS and those two CLOs.

The ABS were: €522m Bavarian Sky France Compartment French Auto Leases 2; €2.25bn Caixabank PYMES 8; CNY3.65bn Driver China Five Trust; €725.7m Lusitano SME 3; €1.335bn Sunrise 2016-2; and £405m Turbo Finance 7. The ILS was US$300m Ursa Re 2016-1.

The RMBS were: €1.8bn BBVA RMBS 17; A$2bn Kingfisher Trust 2016-1; US$400m NRZ Advance Receivables Trust 2015-ON1 Series 2016-T4; US$400m NRZ Advance Receivables Trust 2015-ON1 Series 2016-T5; US$623.5m Progress Residential 2016-SFR²; and US$353.68m Shellpoint Co-Originator Trust 2016-1.

The CMBS were: US$750m Hilton USA Trust 2016-HHV; US$725m Hilton USA Trust 2016-SFP; US$824.4m MSC 2016-UBS12; and US$955m Wells Fargo Commercial Mortgage Trust 2016-LC25.

The CLOs were: €266.2m Arbour CLO 2014-1R and US$330m OHA Loan Funding 2012-1R.

Editor's picks
Premium pricing: Above-par issuance is becoming a staple of the European primary ABS market. Deals backed by auto loans, mortgages and credit cards have recently tested the water with this pricing concept, paving the way for other issuers navigating markets in which negative rates prevail...
Car trouble?: US auto ABS issuance is booming, but collateral continues to deteriorate and delinquencies have climbed by more than 10% year-on-year. With investors required to exercise ever greater vigilance, some compensation by way of spread widening may be necessary...
FX issues: Recent speculation that Deutsche Bank could be selling its Polish unit has highlighted the FX issues associated with shedding non-core mortgage assets in the country. Roughly a third of Deutsche Bank Polska's assets are said to be euro- and Swiss franc-denominated mortgages, the sale of which is likely to be challenged by the Polish regulator in an effort to maintain financial sector stability...
On the agenda: Efforts by European policymakers to tackle the region's non-performing loan burden appear to be gathering pace. Establishing a central clearinghouse for NPLs has been mooted, while the ECB's latest Financial Stability Review calls for the creation of further government-backed bad banks...
Election may yield positive results for SF: The recent election of a Republican government "should be good for economic growth" and securitisation, with credit spreads benefitting from a tightening bias, according to Wells Fargo structured product analysts. They add that reversing already inked regulations might have a mixed result for structured finance in the US, but that a big fiscal stimulus "may push economic expansion past historic norms"...
Draft ILS regulations released: As part of the Chancellor's Autumn Statement, the UK government has launched a consultation setting out its proposed corporate, tax and regulatory framework for ILS. The consultation reiterates the government's aim to create an efficient and streamlined regime for multi-arrangement ISPVs in the UK, setting out the draft regulations it intends to place before Parliament early in 2017...

Deal news
• Continental Finance Company is in the market with a US ABS transaction - Continental Credit Card ABS 2016-1 - securitising below-prime credit card debt. Continental's business model is focused on borrowers with limited credit history or a below-prime credit score.
• Highbridge Capital Management subsidiary HPS Investment Partners is in the market with a new CLO (see SCI pipeline), which will allow up to 80% of the loans in its collateral pool to be covenant-lite. HPS Loan Management 10-2016 has been provisionally rated by S&P and sized at US$410.4m.

Regulatory update
• The European Parliament appears to have reached a consensus on its approach to securitisation. The MEPs responsible for the new securitisation bills are understood to have come to an agreement on risk retention, which had been the main sticking issue.
• The European Commission has presented a package of reforms to strengthen the resilience of EU banks, including measures to facilitate securitisation and derivatives activity. They contribute to the Commission's ongoing work to reduce risk in the banking sector and are in line with the ECOFIN Council in June, where the Commission was invited to put forward relevant proposals no later than end-2016.
• Basel Committee discussions next week may expose divisions between national members and lead to further differentiation between the EU and internationally-agreed Basel standards, Fitch suggests. The latest Basel 3 amendments - sometimes referred to as Basel 4 - seek to restrict the use of internal risk models and set overall capital requirements using the revised standardised approaches.
• Fraud claims alleged by Federal Home Loan Bank of Boston (FHLBB) against RBS Securities and other RBS companies relating to the marketing and sale of 10 RMBS certificates are being dropped after the plaintiff and defendants filed a joint stipulation seeking dismissal. However, a further two claims against RBS remain, and FHLBB also retains claims against other defendants.
• Ally Financial has agreed to pay US$52m in conjunction with its resolution of all outstanding investigations and potential claims by the US Department of Justice (DOJ) related to RMBS issued by the company's former mortgage subsidiary Residential Capital and its ResCap RMBS subsidiaries. It has also agreed to withdraw the broker-dealer registration of Ally Securities, which it says has not been a major part of the company for some time and will not impact Ally's ongoing operations.

Structured Finance

CRR boost?

The European Commission's CRR 2 reforms, which it unveiled last week, include proposals that appear to increase the attractiveness of securitisation in connection with the leverage ratio and net stable funding ratio (NSFR). The package embeds three main Basel 3 elements into EU law: the fundamental review of the trading book (FRTB), the leverage ratio and the NSFR.

IFRS accounting principles currently have to be followed in order to derecognise assets from the balance sheet and improve the leverage ratio. However, Rabobank credit analysts suggest that one of the EC's new rules (Article 429(1)) means that derecognition is seemingly no longer necessary. The rule implies that institutions may exclude from the exposure measure securitised exposures that "meet the conditions for significant transfer laid down in Article 243".

"In our view, this mainly affects full-capital stack securitisations to achieve balance-sheet relief," the Rabobank analysts note. "SRT is clearly harder to achieve than in the past, but for some assets/jurisdictions, getting derecognition from the accountants is an even more complicating factor. All in all, this proposal increases the attractiveness of using securitisations as a tool to strengthen the leverage ratio and to accomplish balance sheet/capital relief in general."

Meanwhile, the new NSFR proposals could directly affect bank ALM investors in both covered bonds and securitisations, according to the analysts. The EC is proposing to lower the required stable funding (RSF) requirements compared to those suggested by the Basel Committee, in order to limit the impact on the real economy. The RSF factors for RMBS/auto ABS and CMBS/consumer ABS/SME ABS would be decreased to 25% and 35% respectively from 50% under Basel 3.

The EC's proposals have been sent to the European Council and Parliament, with the aim of enacting the bills on 1 July 2017.

CS

Capital Relief Trades

Innovative Griffon deal welcomed

Griffon Funding - which Barclays closed in September - has been hailed as an innovative model for banks seeking to reduce their regulatory capital requirements. The £2.43bn privately-placed true sale balance sheet CMBS is backed by 57 loans secured by 1,516 properties and over 12,000 lease contracts.

Carlos Terré, deputy head of structured finance at Scope and lead analyst, states that until now most recent transactions in the commercial real estate space have been direct loan sales. He adds: "The CRE funding mix in Europe is over-reliant on bank debt relative to the funding mix in other jurisdictions."

The agency believes that the Griffon transaction is consistent with Barclays' strategy of managing its balance sheet and costs, improving return on capital, increasing lending where returns justify it and investing in key franchises to improve earnings.

The liability structure features six principal and interest tranches, and two interest-only tranches (see SCI's new issue database). Rated by Moody's and Scope, the transaction comprises: £1.82bn Aaa/AAA class A1 notes (which priced at one-month Libor plus 95bp); £328m Aa3/AA class A2s (135bp); £133.6m Baa3/A class A3s (165bp); £85m Ba3/BBB class B1s (500bp); and £60.7m NR/B+ class B2s (900bp). There is also an unrated class Z tranche sized at £6m.

Scope expects losses of 10bp from the portfolio, which has a weighted average life of three years, even after accounting for expected post-Brexit scenarios. The agency adds that the transaction benefits from significantly better asset pool diversification than traditional CMBS, which are typically exposed to a much smaller number of loans.

The loans securing the Griffon transaction were originated between 2010 and 2016 and have initial terms of between two and nine years. The average loan seasoning is 2.5 years and all but one loan is paying interest based on floating rates.

The underlying portfolio comprises 33.4% office, 26.5% retail, 17.5% industrial, 6.8% multifamily, 5.2% hotel and 10.4% other property types. More than half of the assets (54%) are located in the Greater London area, followed by 14.3% in the South East, 10.1% in the North West and 5.8% in the North East, with the remainder spread across the UK.

Barclays used two alternative channels to originate the loans in the securitisation: the large corporate business unit of the bank; and the UK real estate specialist units. The first channel takes the form of the more standard lending process for corporates, while the second channel processes mandates of highly structured and complex UK real estate financings, typically representing more than £25m.

SP

CMBS

Servicers brace for CMBS wall

Some US$12bn of the US$92bn of US commercial loans maturing during 2017 could default and end up in the hands of special servicers, says S&P. There will be nearly US$120bn in outstanding performing loans scheduled to mature through 2018, most of which were underwritten in 2006 and 2007, raising questions about whether special servicers will be ready.

The year-end delinquency rate for S&P-rated US CMBS peaked at 9.81% at the end of 2012, before declining through 2013 and 2014 to 6.69%. It increased 26bp in 2015, but once again improved during 1H16 and reached 6.36% in June. However, it has since started climbing again and increased to 6.88% in September, partly due to an acceleration of maturity defaults from CMBS loans originated at the height of the financial crisis.

The unpaid principal balance associated with S&P's ranked primary servicers reached US$1.64trn as of the end of June, which is the highest volume in the rating agency's measured period dating back to 2008. S&P says the appetite for commercial mortgage loans may continue to set record levels, with commercial and multifamily mortgage origination projections of US$537bn in 2017, up 4% from 2016's projected volume of US$515bn.

The aggregate number of underlying loans contained within CMBS deals has continued to decline since 2012, largely due to the continued run-off of older vintage collateral through maturity, special servicer loan liquidations exceeding new origination volume and the smaller size of CMBS 2.0 and 3.0 deals. As of the end of June, S&P's ranked special servicers were appointed to US$700bn of CMBS loans, over 42,700 loans, which is down 30% from the year-end 2011 loan count.

"Average CMBS loan sizes are now at US$16.4m, the highest level in the 2008-2016 period. At the same time, our conversations with primary servicers indicate that loan complexity has increased," says S&P.

The agency adds: "In particular, the average number of triggers per loan has been on the rise during the past few years. Still, the smaller universe of CMBS loans and larger average loan size is likely to result in less operational pressure on special servicers as they consider their staffing requirements when the next default cycle accelerates."

S&P notes that CMBS loan special servicer resolution activity dropped to US$13.6bn in 2015, which was the third consecutive year of decline, following a peak of US$51.6bn in 2012. However, it has increased 28% in 1H16 and is expected to be higher for 2016 as a whole than it was for 2015.

During 2015, resolutions were fairly balanced between restructuring/returning to a master servicer, discounted pay-offs and discounted note sales, and completed foreclosure, or deed in lieu and converted to real estate owned. However, the most prevalent outcome was full pay-off, the first time this has been the case.

Dollar volume of sales proceeds for CMBS special servicer REO liquidation activity from 2008 through the first half of 2016 has increased each full year, exceeding US$10bn in 2015. However, nearly half of the entire net sales proceeds achieved from the 500-plus sales during 2015 were derived from the sale of the Peter Cooper Village/Stuyvesant Town collateral.

"The sale of that collateral at proceeds well above the servicers' estimated value had an outsized effect on the aggregate 119.8% sales proceeds/value ratio. Nonetheless, even excluding that unique transaction, the sales proceeds/value ratio still reached 105.9%, which is the highest annual level during the measurement period," notes S&P.

CMBS specially serviced volumes reported by S&P's ranked servicers totalled US$28.3bn as of the end of 2015, down 29% from US$39.7bn at the prior-year end, and down 44% from end-2013 and 66% from end-2011. However, during the first half of 2016, CMBS active inventory actually increased 6% to US$29.9bn, mainly because of the substantial maturities associated with loans originated during 2006 and 2007 that have been unable to refinance.

The anticipated default rate on the US$92bn of 2007 maturities is 13%, resulting in an estimated US$12bn of 2007 loan maturities transferring to special servicing. Applying the same 13% default rate to the entire US$119bn would lead to more than US$15bn of aggregate loan transfers to special servicers that are currently only servicing twice that amount.

"Consequently, we anticipate a continuation of growth in CMBS active inventory through 2017," says S&P.

The vast majority of specially serviced assets have been in the hands of five servicers since 2008, but that concentration has accelerated during each of the past four years, reaching 95% as of 30 June. The top three CMBS special servicers have continued to grow their overall market share each year since 2011, with 88% of CMBS inventory unpaid principal balance in the hands of just three servicers - LNR Partners, CWCapital Asset Management and C-III Asset Management - as of the start of 3Q16.

JL

RMBS

Rare Irish RMBS priced

Lone Star has privately placed a rare Irish non-conforming RMBS. Dubbed European Residential Loan Securitisation 2016-1, the €536.6m transaction is backed by both performing (representing 32.58% of gross book value) and non-performing (63.81%) mortgages originated by Irish Nationwide Building Society.

The loans were extended primarily to borrowers in Ireland, although there are £2.07m of loans secured over residential properties located in England, Northern Ireland, Scotland and Wales, as well as one secured by a property in Portugal. The majority (60.1%) were originated between 2005-2007.

Over two-thirds (65.1%) of the loans are in arrears, with 47.4% in arrears of more than 24 months. Approximately 9% of the loans have been current for at least 24 months and around half of the pool is in negative equity, resulting in a weighted average indexed LTV of 104.97%.

In assessing the future cashflows of the assets in the pool, Moody's divided the pool into performing loans and NPLs, with the performing portion assessed under its standard methodology for RMBS. The agency classified loans as performing if the six-month payment rate was at least 75% of the due instalment and the asset is less than three months in arrears.

However, for some of the loans classified as performing/current, the observed six-month pay rate has been below the required contractual instalment. As a result, the portion of the assets assumed to be performing is reduced to 24.4% of the pool.

The non-performing loans in the pool are within a legal process and recoveries are the only source of cashflows available to them. The quantitative analysis for these loans focuses on estimating the level of expected recoveries and the timing of cashflows. The main parameters are: the volatility of future property prices; haircuts applied to the indexed property values; auctions needed to sell the properties; and the timing for different types of court process, depending on the property type.

Within the pool, 2.95% of the total assets consists of loans for which the property was sold but the sale proceeds were insufficient to fully repay the outstanding loan amount, while 0.66% consists of loans for which there are issues relating to the security. Given the uncertainty of whether the servicer will be successful in recovering on the unsecured loans, Moody's assumes that these loans would yield a zero recovery.

Rated by Moody's and S&P, the transaction comprises €272m A2/A rated class A notes, €12.3m Baa3/BBB class Bs and €12.3m Ba3/BB class Cs. There are also €200m class Ds and €40m class Ps, both of which are unrated.

Irish Nationwide Building Society was taken into state ownership in 2010, subsequently merged with Anglo Irish Bank and renamed Irish Bank Resolution Corporation in 2011. Lone Star affiliate Shoreline Residential acquired a portfolio of loans from Irish Bank Resolution Corporation in 2014.

Pepper Finance Corporation is the servicer for European Residential Loan Securitisation 2016-1 and all qualifying loans in the pool have been formally assessed within the Mortgage Arrears Resolution Process (MARP) to ensure compliance with the Irish government's stipulations. Consequently, legal proceedings for repossession against a borrower can only commence if the servicer has identified that an alternative arrangement with the borrower is not sustainable or the borrower has been classified as not cooperating.

Hudson Advisors has been appointed servicer consultant and its primary task is to monitor the performance of the servicer and agree that any proposed resolutions are appropriate. Morgan Stanley arranged the transaction.

The issuer has the option to sell all or part of the assets. A sale is only allowed if the sale price is at least 85% of the assets to be sold, but there are no restrictions to limit a shift of the asset characteristics of the remaining loans. However, in the event that all the performing loans are sold, the portfolio sale reserve will be available to ensure liquidity is provided to the transaction.

Separately, Cerberus is in the market with its latest UK RMBS - Towd Point Mortgage Funding 2016-Vantage 1. The non-conforming transaction - backed by seasoned re-performing mortgages - is expected to be sized at £821m.

CS

Structured Finance

Developing marketplace

Key themes discussed as marketplace lending sector evolves

Representatives from Orchard Platform, MountainView and Global Debt Registry joined SCI over the summer to discuss marketplace lending developments. This Q&A article highlights some of the main talking points from the session, including the importance of thorough due diligence and data verification, regulatory developments and the prospect of market consolidation. The full webinar can be viewed here.

Q: In an eventful year for the marketplace lending industry - during which growth has been rapid, but not without setbacks - which key themes stand out?
Chris Kennedy, md, MountainView: The market has seen incredible growth up to this stage. Part of the process of a growing market is pull-backs and right now we are experiencing some of that, but this is still a huge opportunity for growth for investors - both investors in loans and in platforms. Unsecured consumer debt and unsecured small business debt is a US$1.2trn opportunity - at least - as US banks are over-regulated and do not have the economics to make these loans effectively.

SoFi was able to get away a first consumer ABS over the summer, with a US$380m deal. SoFi is a platform which was able to raise capital when the markets were open, so it has a significant balance sheet relative to the other platforms - which gives greater flexibility to invest not only in the student loans space where it started out, but now also in the consumer and mortgage spaces. I would expect SoFi to be a regular issuer and that is positive, because the platform's interests are aligned with investors; SoFi is retaining the residuals and verifying the income and assets on 100% of its loans because, along with their investors, it is an investor in these loans as well.

Right now the M&A shake-out will only help the larger players grow market share and self-regulate to a certain extent, developing common standards with regard to being a data furnisher to the credit bureaus and really focusing on what works. I think everyone will realise that lending into the prime space, as SoFi does, works. These borrowers perform and the loans are good loans, so relative to global yield curves, these are above-average opportunities.

To step back five years, Lending Club back then originated US$41m in loans in its first quarter, 1Q11. In 1Q16, it originated US$2.75bn. There are enormous growth opportunities for investors in loans and platforms.

Q: The importance of thorough due diligence has come to the fore this year. What is driving this?
Charles Moore, chief commercial officer, Global Debt Registry: This year has really put due diligence under the spotlight. It has always been important, but the specific issue of due diligence that has really come into focus has been loan verification.

There was some blame of loan verification in 2008 from a process perspective, which did lead to some improvements post Dodd-Frank. However, loan verification tools as part of the due diligence process has not really evolved very much for a couple of decades - and certainly has not kept pace with the innovation we have seen in fintech and the digital lending landscape.

Currently, the loan verification approach taken is generally to compare a loan tape to a loan agreement. The challenge in marketplace lending is that they are both electronic documents that are both provided by the seller of the asset, which represents something of a conflict of interest and is not a particularly robust model. That was being questioned last year by some of the risk departments, but I think this year is when it has really been brought to the front office and become part of the deal conversation.

Investors need to know that they can trust the loan level information they are provided with and know that there is the right kind of independent data integrity provided by the platforms associated with these loans. Investors need to know the data has not been manipulated. We believe the only way to address issues such as those is through real validation, going externally out through APIs back to the original external data sources to validate all of that underlying data by the investor.

A whole host of loan validation services are now being requested by the larger investors and by the warehouse lenders providing credit into this space, and the industry is starting to recognise the need for technology to provide a much more robust risk management process around due diligence and loan level validation for these assets.

Q: The concept of 'trust but verify' has been increasingly discussed in marketplace lending. Why is data standardisation important in this regard?
Brady Akers, director, Orchard Platform: Orchard is a data and technology company focused on building systems and standardising data to power the interactions between institutional investors and online lenders. Data standardisation across loan originators is a core focus of ours.

Trust and verification are critically important, especially for this emerging industry to grow, and transparency is a necessity. I think it will take a coordinated effort for participants across the industry, and companies like Global Debt Registry, PwC and Thomson Reuters will play a vital role in due diligence and validating that borrowers actually exist, and that the data is accurate.

Orchard's focus on data standardisation means that after loans have been originated, it is our job to ensure that data reported to prospective and current investors is consistent and of a high quality. That includes the credit variables, loan-level details and also the ongoing payment-level data.

Institutional investors looking to enter this space, or deploy more capital, begin their research with data analysis. Right now, that is a very difficult and expensive process because datasets are not consistent across lenders. A lot of what Orchard is doing is working towards creating an industry-wide dataset for both credit and payment variables for investors to easily compare opportunities across multiple lenders.

Q: Regulatory initiatives are changing the market. What are the implications of this from an audit perspective?
CK: From an auditor's perspective, we are starting to see some requests that not only lenders but also platforms go out and seek independent third-party fair value marks - not only on the loan portfolios, but also the servicing assets of these platforms. On the loan side, it has been a pretty simplistic model of holding the loans at par and adding monthly adjustment for accrued interest and layering in some loss provision. Talking to investors and platforms, we have said that you really want to bake in a more robust approach and move to a discounted cashflow methodology.

One thing I continue to hear from market participants is that there is no historical data. While the larger platforms like Lending Club and Prosper have data going back pre-crisis, the credit bureaus are also a wealth of data and have data products addressing this market segment, so there is data out there you can purchase for benchmarking purposes. We are still in the early innings of this process, but I think it is one that is going to help the market.

Q: There is a lot of debate about what constitutes 'true' marketplace lending. This is made even more complicated by the way funding models are changing. What are the developments in this space?
BA: We are seeing the change happen before our eyes. Many platforms are exploring a so-called hybrid funding model, where the lender uses multiple sources of capital to fund loans. The thought is that by diversifying the source of capital, a platform may improve their chances of weathering adverse market conditions. The idea caught on, particularly in the US, as institutional investors - who had become the main source of funding for many loan originators - slowed purchasing in the first half of 2016 and, as a result, origination volumes suffered.

These hybrid models consist of balance sheet lending, loan securitisations, credit facilities and whole loan purchase agreements by institutional investors. They make sure that interests are aligned, that your funding sources are diversified, your revenue streams are diversified and ultimately you can keep each channel honest and drive down the cost of capital in the long run.

I think the UK is more focused on the original 'marketplace model' and funding loans by retail investors, partly due to regulatory clarity and support.

Q: How much of an issue is loan stacking and should market participants be worried about it?
CK: Loan stacking is nothing new. It is called shot-gunning in the US mortgage market, where it has affected all investors, including Fannie and Freddie.

The process is really understanding and tracking borrowers, so platforms will need to work with the credit bureaus to create some kind of data exchange. However, loan stacking is only affecting something like 5%-10% of the market.

A lot of the platforms are trying to address it by looking at bank statements for any large deposits. The fundamental problem though is that not every platform is a data source for the credit bureaus, so that is a risk in the system.

Platforms are aware of it and trying to create solutions to it. In the mortgage market, one of the uses of MERS is that it has an application date, borrower name and social security number, so before a loan closes you can check there are no other applications. The marketplace lending association that was recently created has the opportunity to create something like this, working with the credit bureaus and creating some kind of data exchange.

Q: If there is market consolidation over the next year or two, what will be the implications for data verification?
CM: The Treasury has called for a registry, which would be useful in the development of a secondary market and in an economic downturn of MPL consolidation and borrower delinquency. It also helps cross-checking applications and avoiding loan stacking.

There is an inevitability to industry consolidation. There are 250-plus platforms in the US and many do not have critical mass and so will fall by the wayside.

The question is how orderly that process will be and given the relatively limited investor controls around loan data integrity. That is considered when there is an opportunity for some bad things to occur. That is when real loan validation and external third-party checking back to the original data sources - rather than relying on the loan tape and loan agreements from the platforms themselves - will really come into its own.

In terms of getting a secondary market up and running, in order to have confidence in an asset that is being purchased in the secondary market, you really need that independent validation of all of the underlying loan-level information (including ownership rights) to give you certainty, because the reps and warrants will always struggle to scale - particularly when they are not backed up by billion-dollar balance sheets.

JL

Structured Finance

Fixed income firm nabs sales duo

Alcentra has made two new hires to its business development team in London. Nicholas Pont joins as md, senior institutional marketer and Sam Morse as executive director, institutional marketer.

Pont was previously at PIMCO, where he was head of UK and Ireland business development. In his new role at Alcentra, Pont will be responsible for selling Alcentra's entire suite of corporate credit strategies, including senior loans, high yield, direct lending, special situations and structured credit in the UK.

Morse was previously sales director at Muzinich & Co, where he was responsible for the development of the UK institutional business. At Alcentra, he will work closely with Pont to help sell Alcentra's strategies to institutional investors, such as public and corporate pension funds.

Structured Finance

French firm makes senior hire

Cartesia has hired Jérôme Anglade as partner and md. He will be in charge of the CLO and structured credit business, working alongside Tanguy Boullet and Hadrien Carré.

Anglade has 20 years' experience in structured credit, including 11 years at Morgan Stanley in London, where he was responsible for the European structured credit business. He also has experience in marketplace lending, where he has created several funds and investment vehicles and in which Cartesia is also expanding its investment management, structuring and securitisation activities.

Structured Finance

Trustee service expands in Korea

BNY Mellon has been granted a full All Asset Trust License status in Korea. The move will enable the firm to provide trustee services for the domestic market, expanding its international services to Korean clients.

The All Asset Trust License complements BNY Mellon's Money Trust License, growing its trustee services capabilities from money receivables trusts to intangible property rights. The new license also allows BNY Mellon to offer a comprehensive suite of domestic issuer and related investor services, including the ability to offer alternative investment options on cash balances in ABS structures.

Gary Lew, BNY Mellon's Asia Pacific head of corporate trust, comments: "ABS structures are attractive to investors from a diversification standpoint, whether within the domestic market or for foreign investors investing into Asia. The broadening of our trustee services to offer a comprehensive suite of solutions further supports our commitment to the steadily developing Korean ABS market."

He continues: "The growth of the Korean ABS market has been accelerating since the Asset-Backed Securitisation Act was implemented in 1998. Korean issuers are using ABS structures not only as a lower cost tool to restructure maturing debt and secure liquidity, but also as an essential balance sheet tool that Korean lenders can use to convert loans to long-term, fixed rate plans."

Insurance-linked securities

ILS firm swaps chiefs

Michael Krefta will assume the role of ceo for Hiscox Bermuda as of 1 August 2017. This follows the announcement that Jeremy Pinchin, ceo of Hiscox Re and ILS and ceo of Hiscox Bermuda, will return to London.

Krefta is currently chief underwriting officer of Hiscox Re and in his new leadership role will be based in Bermuda. He will report to group ceo Bronek Masojada and will also join the Hiscox executive committee.

Pinchin will step down from his Bermuda-based roles, but on returning to London will continue his role as Hiscox group claims director and remain on the Hiscox executive committee. He will also join the board of Hiscox special risks.

Risk Management

Analytics platforms integrate

GoldenSource has integrated with ICE Data Services' APEX delivery platform. The move builds on GoldenSource's 10-year history of allowing mutual clients to gain access to ICE Data Services. The aim of integrating with the APEX delivery platform is to provide a scalable way for GoldenSource users to manage their data operations, as well as helping them manage risk exposure and support regulatory requirement workstreams.

ABS

Liquidity facility reduction agreed

Unique Pub Finance Co last week canceled £37m out of the £190m liquidity facility amount available to the UK whole business securitisation via an agreement with RBS. Going forward, the liquidity facility amount will be sized to cover the maximum amount of debt service over any future 18-month period, with the amount available for the class M and N notes limited to £45m and £12.5m respectively.

The immediate effect is a reduction in the liquidity facility amount to £153m. Further quarterly reductions will result in the liquidity facility amount reaching £148m by December 2022, £48m by December 2024, £26m by December 2026 and £12.5m by September 2027.

At this stage, S&P says it does not consider that the reduction in the liquidity facility amount will affect the creditworthiness of the notes issued by Unique Pub Finance Co. As such, its ratings on the class A3, A4, M and N notes remain unchanged.

ABS

Charge-off record reversed

US credit card ABS 60-plus day delinquencies and charge-offs are up slightly from previous record lows, according to Fitch. After remaining below 1% for the last six months, Fitch's index shows an increase in 60-plus day delinquencies and charge-offs to 1.01% for the month of November, although the level remains well below the historical high of 4.54% in December 2009.

Additionally, Fitch's prime credit card charge-off index rose from its record low of 2.43% in October to 2.54% last month, but remains 2.3% lower year-over-year and nearly 45% lower than the index high from September 2009. After improving for the past two months, the agency's prime monthly payment rate index retreated to 28.51% from 29.69% in October.

The prime credit card gross yield index rose for the second straight month to 19.14%, while the prime credit card three-month excess spread index held steady, decreasing just 1bp to 13.93%. Retail credit card metrics also retreated this month, as both charge-off and 60-plus day delinquencies rose while gross yields fell. The retail credit card charge-off index increased for the third straight month to 6.71%, meaning the index is 3.87% higher year-on-year.

Additionally, the rating agency's retail 60-plus day delinquency index continues to rise, increasing for the third month to 2.63%, and stands at its highest value since December 2014. Fitch's retail credit card monthly prepayment rate index decreased to 15.52% for August, the agency's retail credit card gross yield index fell 2bp to 29.34% and its three-month average excess spread index improved for the third month in a row to 19.49% - which is a new historical record.

ABS

PACE residuals deal prepped

Renovate America is in the market with an usual PACE securitisation. Dubbed HERO Residual Funding 2016-1R (Cayman), the US$125m transaction is backed by the residual certificates of five previously issued PACE ABS from the HERO platform.

The collateral consists of the residual certificates issued by the HERO Funding Trust 2015-1, 2015-2, 2015-3, 2016-1 and 2016-2 deals. These transactions are backed by US$1.01bn of PACE bonds issued by the Western Riverside Council of Governments, San Bernardino Associated Governments and County of Los Angeles, California. The PACE bonds are, in turn, secured by a pool of 44,912 PACE assessments levied against residential properties in 31 Californian counties.

LA County is the largest county, representing 26.93% of the assessments. The assessments have an average balance of approximately US$22,459, a weighted-average annual interest rate of 8.06% and a WA original term of 14.97 years. They were originated between November 2012 and April 2016.

The source of repayment for the notes is collections realised on the residual certificates. Such amounts represent collections in excess of transaction fees, expenses and debt service of the rated notes issued in the underlying transactions.

Provisionally rated by DBRS, HERO 2016-1R comprises US$89m triple-B (high) rated class A1 and US$36m triple-B class A2 notes.

The DBRS presale report for the transaction notes that three class action complaints were filed on 1 November, naming the PACE bond issuers and Renovate as defendants. Each of the complaints asserts statutory violations of consumer lending laws related to disclosures, documentation and fee and rate practices, and seeks relief to be determined at trial. An affiliate of Renovate has disclosed in offering materials relating to the pending HERO Funding 2016-4 securitisation (see SCI's pipeline) that it considers it unlikely that the impact of the complaints on Renovate will be material to the securitisation due to Renovate's de minimis role in relation to the issued notes.

ABS

MPL disclosure paper published

SFIG has released a green paper on the responsible growth of securitisation in the marketplace lending sector, focusing initially on sufficient data disclosure. The paper seeks to identify a framework of market standards and recommends best practices through an open discussion among a broad cross-section of market participants.

The organisation has also established a marketplace lending committee made up of 250 individuals representing more than 70 SFIG member institutions. The initiative has established five work streams related to marketplace lending, including disclosure and reporting, representations and warranties, regulation, operational considerations and enforcement.

SFIG's marketplace lending green paper is the first to come out of the disclosure and reporting work stream, with the goal of publishing recommended best practices for data disclosure of underlying asset pool collateral. The scope of this work is loan level data disclosure, pool level data disclosure and ongoing performance reporting. The recommended disclosure package is specific to securitisations of unsecured consumer loans originated by marketplace lenders.

Future green papers will address the components under consideration in other work streams.

ABS

Acquisition prompts amendments

Structural amendments have been implemented in relation to Dutch auto lease ABS Highway 2015-I, following a change in ownership of the transaction's originator, Athlon Car Lease Nederland. Mercedes-Benz Financial Services Nederland acquired all the shares in Athlon on 1 December.

As a result, the back-up servicer - De Lage Landen International - has been replaced by Mercedes-Benz Bank, which will take over all back-up servicer obligations. In addition, the commingling reserve will be funded in an amount of the required commingling reserve amount.

Previously, the requirement to fund the commingling reserve was related to the rating of Athlon's former parent, Rabobank. Due to the funding of the commingling reserve, the role of the commingling reserve guarantor will be terminated.

A further amendment is the take-out of the cash advance facility. The reserve fund provides liquidity to a sufficient level, according to Moody's.

The agency has determined that the amendments will not result in the downgrade or withdrawal of the ratings on the issued debt of the issuer.

Structured Finance

New entrants to boost issuance

Moody's anticipates a slight increase in issuance of European ABS and RMBS next year. The agency expects new entrants to take a larger share of the market, amid increasing appetite for non-performing loan transactions and marketplace lending ABS.

"Our key credit considerations would focus on differing origination criteria from traditional banks and the lack of historical data. Auto ABS will flow into the pipeline, but with higher market risks shifted to investors, owing to higher balloon instalments and residual values," says Carole Sanz-Paris, a vp and senior analyst at Moody's.

The agency says increasing origination will stem from specialised lenders and non-bank entities, particularly in the UK and the Netherlands. Private equity funds have entered the mortgage market and use securitisation to refinance the purchase of portfolios (SCI passim), while MPL ABS is likely to continue to develop in Europe as part of the on-going trend towards disintermediation.

"Securitisation of re-performing loans and NPLs will increase, as banks continue to deleverage. Accumulated NPLs - particularly in Italy, Spain and Ireland - continue to weigh on banks' balance sheets, the housing market and credit availability. In the peripheral RPL and NPL markets and in Northern Europe, private equity firms will likely increase their exposure to these loans," says Greg Davies, an avp at Moody's.

Current regulatory proposals that define EU qualifying transactions as 'simple, transparent and standard' (STS) remain within the EU legislative process and Moody's expects them to be finalised in 2017, albeit with the possibility of delays. These proposals follow the consensus that an efficient securitisation market is an important factor in promoting national and regional economic growth.

The agency believes that greater regulatory transparency is credit positive. For example, the guidelines of the CRR stipulate that any reduction of regulatory capital requirements achieved through securitisation should be justified by a significant transfer of risk (SRT) to third parties. This kind of specificity is credit positive, as it provides market participants with a clearer environment in which to assess their funding options, according to Moody's.

Structured Finance

Good credit quality anticipated

Moody's expects the performance of the Indian, Korean and Singaporean securitisation markets to be stable in 2017. Good credit quality across most asset classes is anticipated.

"In India, robust growth and low oil prices will underpin stable auto ABS performance, despite the economic disruption from the country's demonetisation," says Yian Ning Loh, a Moody's svp. "In Korea, low unemployment and interest rates will keep credit card ABS delinquencies low, while covered bond credit quality will also remain strong in both Korea and Singapore."

The agency expects the performance of Indian commercial vehicle loans backing auto ABS transactions to remain stable, with good credit characteristics. Delinquency rates could increase somewhat in the very short term due to the Indian government's decision to withdraw R500 and R1,000 notes. However, delinquencies should return to their current levels over the course of 2017, owing to robust economic growth and low oil prices.

Residential mortgage performance should also remain strong in 2017, with low delinquencies reflecting low interest rates, steady house prices and stable prepayment rates.

In Korea, meanwhile, delinquency rates for credit card receivables were low in 2016 and should remain low in 2017. The credit quality of new credit card ABS deals issued in 2017 will also be good, says Moody's.

Finally, the credit quality of new and outstanding Korean and Singaporean covered bonds is expected to remain strong and stable next year, supported by the high credit quality of the issuers and the strength of the sovereigns.

Structured Finance

Issuance landscape surveyed

Central bank quantitative easing measures will influence EMEA ABS and RMBS the most, according to half of the market participants recently polled by Moody's. Some consider that such measures are cannibalising issuance, while 45% of those surveyed expect levels to remain stable in 2017.

"Specialised lenders and non-bank entities will make up an increasing share of issuance in 2017, particularly in the UK and the Netherlands. Private equity funds have penetrated the European mortgage market and use securitisation to refinance portfolio purchases," says Moody's Carole Sanz-Paris.

Some European banks choose to retain ABS/RMBS issuance for repo purposes, squeezing market liquidity for European ABS and RMBS. Moody's says the ECB's ABS purchase programme's circa €21bn holding is negligible compared to the €1.3trn held by the bank's broader asset purchase programme, highlighting the low supply of publicly placed ABS and RMBS. In the UK, meanwhile, cheap financing under the Bank of England's term funding scheme makes the economics of securitisation less attractive for prime and potential buy-to-let lenders.

While new entrants may support issuance levels, Moody's says the lack of historical data, different origination practices and segmented products are key credit considerations for pools originated by new entrants.

While 35% of those polled believe that low interest rates will influence EMEA ABS and RMBS the most, Moody's says low rates will support borrower affordability.

Negative Euribor rates have led to negative ABS and RMBS coupons, with issuers choosing to floor coupons at zero. This creates a reduction in excess spread of 15bp on average, affecting more than 500 ABS and RMBS tranches rated by the agency.

Structured Finance

EMEA SME ABS trends to continue

EMEA SME ABS market activity and deal characteristics will be driven by a broad array of originators' objectives, says Moody's. The trend for disintermediation will lead to more marketplace lending and SME CLO transactions, with the rating agency expecting performance to remain stable across all major markets.

Originators have multiple objectives, such as tapping either the public market or targeting ECB funding, as well as disposing of NPLs and managing regulatory capital via synthetic securitisations. Many of the trends witnessed in 2016, such as Italian banks targeting the ECB's minimum requirements to amplify volumes, will continue in 2017.

Structuring transactions to meet ECB repo requirements - particularly in Italy - is driving a trend towards single-A rated senior notes, a preponderance for esoteric leasing receivables and real estate assets representing a growing share of Italian SME leasing ABS. The quick amortisation of existing senior notes should also see more restructuring of outstanding transactions in 2017.

Increased loan origination by non-banks, such as marketplace lender platforms, is expected to create unique risks compared to conventional SME ABS. Synthetic deals that help to manage regulatory capital are also structurally different from true sale deals, but not riskier by default.

Low interest rates and favourable credit conditions should support SME debt performance. This is expected to compensate for an overall slight decrease in GDP growth across Europe, while Brexit will continue to create legal uncertainty but should only have limited impact on outstanding transactions.

Issuance volumes should slightly increase, driven by the core markets of Spain and Italy. Occasional activity is anticipated from Belgium, Germany, the Netherlands, Russia and the UK. There should be more SME debt backed NPL securitisations coming to market, not least from Italian banks pressured to clean up their balance sheets.

Structured Finance

Liquidity stress anticipated

Fitch believes that demonetisation could lead to a short-term liquidity stress in Indian auto ABS transactions. The agency suggests that providing the stress is limited to a few months, it is unlikely to result in pressure on ratings.

India began to withdraw high-denomination bank notes - that account for 86% of the value of currency in circulation - earlier this month (SCI 28 November). The withdrawal has created a cash crunch that Fitch expects to hold back economic activity in the near term.

Indeed, the agency expects a liquidity squeeze in Indian auto ABS to result from a substantial drop in collections from small commercial vehicle (CV) operators - especially used-CV operators - in November and December. Cash collections typically account for 20%-50% of total collections by Indian CV loan originators within Fitch-rated ABS transactions. The cash-collection percentage is especially high on loans for used CVs, as well as for new small CVs, light CVs and tractors.

Smaller CV operators usually receive their income and pay expenses in cash. Fitch expects the cash crunch caused by demonetisation to affect both the income of these borrowers and their repayment capabilities in the short term, due to the delaying of non-critical economic activities by their customers.

Furthermore, the impact of demonetisation on economic activity could lead to a temporary drop in demand for services involving CVs, creating stress on the repayment capabilities of CV loan borrowers. Additionally, Fitch anticipates a moral-hazard risk of capable borrowers also defaulting on their monthly repayments, given the potential for a general increase in tolerance of delinquencies due to this disruption.

Delinquencies are expected to remain high for several months in 2017, as small borrowers are likely to take time to make up for missed payments.

Average collection for Fitch-rated Indian ABS transactions was around 107% of scheduled investor pay-out obligations, as of the last reported collection month. In a scenario of a sharp decline of 30% in collections, all Fitch-rated Indian ABS transactions could manage timely payment of interest and principal for at least nine months and on average for 24 months, with support from available external credit enhancement. Nevertheless, there could be an impact on the ratings of recent, less-seasoned transactions if delinquencies continue to rise sharply for more than a few months.

Structured Finance

Recovery analysis RFC issued

S&P is requesting feedback on its structured finance recovery analysis of US RMBS, US and Canadian CMBS and global CLOs. The rating agency's intention is to provide information that looks beyond its first-dollar-of-loss credit ratings in cases where its credit ratings are limited because of timeliness of payments, and to facilitate greater credit differentiation within its existing credit rating categories.

Comments for each sector are requested by 31 January next year. S&P stresses that its recovery analyses are not ratings and will not affect credit ratings criteria.

"Our structured finance credit ratings provide an opinion about the relative ability of an issuer to pay its obligations in accordance with their terms, which means payments must be made in full and on time. Hence, our issue credit ratings are often described as a first-dollar-of-loss credit opinion because failing to pay a single dollar of what is due constitutes a failure to pay per the obligation's terms. While we believe that this is the gold standard to measure a borrower's relative creditworthiness, we recognise it comes with certain consequences," says S&P.

The agency lowers its ratings if contractual payments have been missed or if it believes they will be missed. However, there may be cases where temporary liquidity constraints may cause a payment to be missed but where it is expected to be subsequently made up. In cases such as this, S&P believes it would be useful to provide supplemental information related to the magnitude of post-default cash flows.

Additionally, as credit ratings fall along a letter scale with a discrete number of rating categories and subcategories, differentiating the credit risk of two similarly rated instruments may be difficult. Therefore, the proposed approach could help investors to differentiate among multiple instruments with the same credit rating.

CLOs

CLO performance predicted

US CLO performance should be stable in 2017 as corporate defaults recede, says Moody's. Despite a weak macro outlook, European CLO performance should also be stable.

The credit quality of loans in new US CLOs is anticipated to weaken, despite regulatory discipline, as investor demand for loans outstrips supply. CLO credit quality is not expected to change substantially, with the vast majority of existing deals expected to have stable performance as reinvesting CLOs continue to satisfy their collateral quality tests.

The credit quality and structures of new CLOs issued in 2017 will be similar to those issued in 2016, says Moody's, with some investor-driven changes. Subordination levels, cash-flow waterfalls, and concentration limits will not depart from those of recent years, with most new variations expected to be designed to entice demand from particular investor groups, or to increase manager flexibility.

For example, investment-grade rated fixed-rate tranches could be popular with insurance companies. With issuance of pari passu tranches with different spreads and offsetting price differentials that attract investors with varying appetites for future refinancings should also be relatively common. Less common will be CLOs which issue tranches in loan form.

Collateral managers are also expected to seek greater flexibility to deal with troubled loans. Investors should allow this, within limits.

The creation of manager entities specifically designed to comply with US risk retention rules is one way in which CLO managers may adapt to Dodd-Frank. Moody's notes that CLO managers could face challenges in operating through such entities, including managing capital needs, regulatory compliance and conflicting investor demands.

New issue volume for US CLOs is expected to be similar to 2016 levels. Meanwhile, the European market is also expected to remain fairly stable in 2017, albeit with slightly depressed issuance.

European collateral quality should remain steady amid slow growth and low default rates. Brexit and EU regulatory actions should have minimal impact on CLOs next year, but may affect performance and volumes further in the future.

European CLO structures are expected to be consistent with those already seen. Leveraged loan performance could decline somewhat, but should remain strong relative to historical averages.

CLOs

Post-crisis single-Bs outperform

The total amount of CLOs paid down in JPMorgan's Collateralised Loan Obligation Index (CLOIE) since the October rebalance through 30 November was US$9.62bn in par outstanding, split between US$1.96bn and US$7.66bn of pre-crisis and post-crisis CLOs. US$17.3bn was added to the post-crisis CLOIE across 182 tranches from 40 deals at the November rebalance.

CLOIE extended a streak of five straight months with positive total returns in every sub-index. The November total return for CLOIE (0.26%) compares similarly to loans (0.38%), but favourably to fixed rate assets, including high yield (-0.16%) and investment grade (-2.52%).

Post-crisis single-Bs were the top performing tranche last month, tightening 60bp across the index and returning 5% on the month. Year-to-date single-Bs have returned 18.33%, compare to single-B loans (8.77%), single-B high yield (12.16%) and triple-C high yield (29.39%).

CLOs

Euro CLO involvement to broaden

The European CLO investor base should broaden in 2017, with some interest from institutions in east Asia, says Moody's. The agency anticipates €13bn-€15bn of new European CLO issuance across 30-35 new transactions, compared to €14.6bn from 37 transactions in 2016 so far.

"We expect US CLO managers to enter the European market. That said, investor interest in multi-currency deals will remain limited. Brexit threatens to add volatility to the euro/pound sterling exchange rate, which would add FX risk in the absence of perfect hedges," says Ian Perrin, an associate md at Moody's.

Risk retention poses a high barrier to entry for many companies. Should it ultimately be raised further, some managers may be forced out of the market.

Meanwhile, Moody's says loans to private-equity sponsored firms will bear the brunt if the ECB applies new leveraged lending standards. If the ECB introduces leveraged lending guidance similar to that in the US, the agency does not anticipate that it will have much impact on the quality of loans being securitised in new CLOs, even if it takes effect in 2017.

There should also be more covenant-lite loans in 2017. These comprised 22% of all European leveraged loans in 1H16 and have dominated issuance since the credit market flows resumed after the Brexit vote.

"About two-thirds of loans have been 'covenant-loose', incorporating just one or two maintenance covenants. The shift to fewer and weaker covenants - which has primarily manifested itself in refinancings - will increasingly affect the B1- to B3-rated companies, which comprise a high proportion of CLO collateral," notes Moody's. However, borrowers in economically weaker sectors are less likely to successfully negotiate cov-lite terms.

CMBS

Risk retention to affect CMBS liquidity

The impending US risk retention rule could hamper liquidity for maturing CMBS loans, says Morningstar Credit Ratings. The rule comes into effect on 24 December (SCI passim).

The agency believes loans maturing this month may suffer from a decrease in liquidity. It says the potential liquidity contraction will add to the refinancing challenge of 2007 vintage loans, many of which are of lower credit quality.

One of the loans coming due this month is the US$51m 300 7th Street loan accounting for 8.5% of COMM 2006-C8. It has suffered a 4.4% decrease in net cashflow since issuance and Morningstar does not believe the borrower will be able to obtain full take-out proceeds to retire the loan, so the sponsor may have to invest additional equity to refinance the loan. Morningstar values the collateral at US$58m.

The US$48.5m Pinnacle at Tutwiler loan, accounting for 5% of CSMC 2007-C1, has seen net cashflow decline 12.8% since underwriting. Again, the interest-only loan was overleveraged at issuance and a fifth of leases are scheduled to expire by the end of February. DSCR has been below 1.1x since 2Q15 and the collateral is now valued at US$37.1m, suggesting a US$11.4m value deficiency.

The US$48m Sevilla Apartments loan, accounting for 4% of LBUBS 2007-C1, may also struggle to refinance without borrower equity. It has high leverage, no amortisation and net cashflow that has never attained underwritten levels. Morningstar believes there is a US$1m deficiency for the asset.

The US$23m HSBC/BofA Portfolio loan, accounting for 1.8% of JPMCC 2006-LDP9, has seen weak net cashflow and no amortisation, so a full take-out could be a challenge unless the borrower contributes additional equity. The Rockaway Park property, accounting for 32% of the GLA, has been vacant since 2012 and the tenant's lease expired in early 2016. Morningstar's valuation for the portfolio is US$23.5m.

Finally, the US$21m Wakefield Commons I & II loan - accounting for 7.4% of MSC 2007-T25 - has a current estimated LTV of 103.4% because net cashflow has declined 23.6% from the underwritten amount and the interest-only structure has not allowed any deleveraging since issuance. Occupancy declined from 99% at issuance to 83% in June. Morningstar's maturity analysis suggests a US$20.3m value for the asset.

CMBS

Loss severity spikes

Trepp's latest US CMBS loss analysis reflects a spike in the average loss severity of loan dispositions. For the month of November, US$671m across 58 loans was liquidated with losses. Average loan size fell from US$15.5m in October to US$11.6m, while the monthly loss rate for all loans climbed to 56.38%.

Accounting for nearly 40% of last month's total liquidated balance, the four largest conduit loans that paid off all suffered losses in excess of 80%. Topping the list for realised losses in November is the B-note portion of the US$305m Riverchase Galleria loan (securitised in BACM 2006-6), which took a 96.29% loss after the asset was refinanced (see SCI's CMBS loan events database).

Another large retail loan that closed out with extensive losses is the US$76.7m Hanover Mall, which experienced an 81.20% loss severity. The US$59.5m Avion Business Park Portfolio and the US$34.6m Morgan 7 RV Park Portfolio - which paid off with 94.56% and 100% losses respectively - round out Trepp's list of top conduit losses for November.

CMBS

Delinquencies continue to climb

The Trepp US CMBS delinquency rate continued to climb in November, reaching 5.03%, an increase of 5bp from October. The rate is now only 10bp lower than the year-ago level and 14bp lower since the beginning of the year.

CMBS loans that were previously delinquent but paid off with a loss or at par totalled about US$800m last month. Removing these previously distressed assets from the numerator of the delinquency calculation helped push the rate down by 18bp.

Over US$700m in loans were cured last month, which helped drive delinquencies lower by another 16bp. However, over US$1.1bn in loans became newly delinquent in November, which put 25bp of upward pressure on the delinquency rate. A reduction in the denominator due to the maturation of performing loans accounted for the remainder of the difference.

CMBS

Retailer's exposure 'at risk'

Hhgregg has reported lower earnings for the second fiscal quarter ended 30 September, following a series of store closures. Morningstar Credit Ratings suggests that the move may foreshadow a decline in the retailer's brick-and-mortar presence, potentially putting 43 properties backing US CMBS loans - totalling US$2.64bn in allocated property balance - at risk.

"While we do not expect a slew of store closures in the short term - in fact, the company announced it would be expanding its luxury brand, Fine Lines, in the coming years - we believe the realignment may pose a risk to stores with upcoming lease expirations," the agency notes. "We identified only seven properties in CMBS loans, totalling US$176.3m in allocated property balance, where hhgregg's lease will expire in the next three years and none of the loans with balances over US$10m would be materially affected by hhgregg's departure."

Although hhgregg has only closed six stores - three of which back CMBS loans totalling US$179.2m in property balance - since 31 March 2016, Morningstar believes this could become a trend. As of the second fiscal quarter, the retailer lowered the fair value estimate of 22 struggling stores - which had an aggregate net book value of US$2.1m - to US$700,000, based on the stores' projected cashflows.

If hhgregg closes additional stores, several loans will have a heightened risk of default, as the tenant represents over 20% of the gross leasable area at more than a third of the properties, with a combined property balance of US$170.4m. Because hhgregg is a large tenant, 17 properties - with a property balance of US$255m - would see their occupancy drop below 80% (which is Morningstar's threshold for at-risk occupancy), should hhgregg vacate.

The three closed stores are located in properties backing the US$18.2m Townline Commons (securitised in CWCI 2007-C2), the US$128.5m EDT Retail Trust Portfolio (JPMCC 2010-C2) and the US$149.3m Fox River Mall (WFRBS 2011-C4) loans. However, Morningstar indicates that the default risk of these loans is low, as Bob's Discount Furniture plans to open new stores in 2017 at the properties backing the Townline Commons and EDT Retail Trust Portfolio loans.

Similarly, none of the loans with upcoming hhgregg lease expirations appear to be high risk. Of these loans, the US$96.7m IAC Portfolio loan in JPMCC 2011-C3 is the largest.

Hhgregg - which occupies 11.7% of the gross leasable area at Clearwater Mall, the largest property in the portfolio (accounting for 47% of the allocated balance) - has a lease that is set to expire in October 2019. The retailer only accounts for 2.7% of the portfolio's total GLA and the loan is operating at a 1.66x debt service coverage ratio, as of 31 March 2016, so a potential departure would have a negligible effect on the loan.

CMBS

Class X CMBS cash put aside

The note trustee for Titan Europe 2006-5, US Bank (previously ABN Amro), has instructed the cash manager to retain €50m to provide for potential liability arising from class X noteholder contentions. As with a further four other Titan deals which are subject to class X noteholder litigation, it is unknown whether additional class X interest following default will ultimately rank senior to class A1 principal.

The other four Titan CMBS are Titan Europe 2006-1, Titan Europe 2006-2, Titan Europe 2007-2 and Cornerstone Titan 2007-1. The investment manager over the class X notes in these transactions is arguing in the UK court of appeals that additional interest following a default, due under the loans which are the subject of those transactions, should be taken into account when calculating the class X interest rate, with the court's judgment currently awaited.

An event of default notice for Titan Europe 2006-1 was issued on 29 January 2015 and a note enforcement notice was issued, declaring the notes immediately due and payable, on 26 February of that year. The trustee last month instructed the cash manager to retain €50m to provide for potential resultant class X liabilities.

All five Titan CMBS share similar documentation and would be affected by a court judgment ruling that class X interest needs to be paid before class A1 principal. The Titan Europe 2006-5 trustee says it has neither expressed nor implied any view or opinion on which payment should take priority, but notes that it is retaining the funds as the prudent course of action.

CMBS

Sporadic issuance projected

European CMBS new issuance will focus on riskier loans in 2017, according to Moody's. The agency expects volume to be sporadic, as issuance focuses on more complex loans, coupled with bond pricing fluctuations in the wider securitisation market.

Pricing will continue to be the main restriction for new issuance. Moody's anticipates wider securitisation market volatility, which is in stark contrast to stable and competitive European loan markets.

"The disconnect between the two markets often limits the viability of a CMBS exit, even though the underlying fundamentals of a transaction may be very similar to a successful CMBS transaction, executed only a few months earlier," says James Belchamber, an analyst at Moody's.

However, with spreads in the securitisation market tightening over recent months and loan margins moving out, the CMBS market is beginning to look more competitive - which could support issuance throughout 2017. CMBS will remain primarily attractive to asset managers and opportunistic investors, due to the current regulatory treatment of the transactions.

Meanwhile, on legacy European CMBS transactions that are scheduled to reach legal final maturity in 2017, Moody's expects average losses of 21% of the original note balance - despite a stable CRE market outlook. The agency rates eight transactions with legal final maturities in 2017 for a total outstanding note balance of over €2.2bn. These transactions are backed by outstanding loans for which Moody's estimates the underlying property value at €1.8bn.

There is a high risk of losses as pools become more concentrated and CMBS tranches become even more exposed to idiosyncratic risks. Moody's expects on average 46% of principal losses for underlying loans currently in workout in special servicing.

For several of the legacy European CMBS transactions, the workout process for defaulted loans will not be finalised by their note legal final maturity. The agency says the extent of the risk that transactions are not fully repaid by note legal final is also highlighted by the fact that for 30% of the defaulted loans in special servicing, the time to note legal final maturity is less than one year.

Risk Management

CCP recovery rules proposed

The European Commission has proposed new rules to install a recovery and resolution framework to ensure that central counterparties (CCPs) can be dealt with effectively, should they come into financial difficulty. This resolution framework is also aimed at helping to avoid the costs associated with the restructuring of failing CCPs falling on taxpayers.

The rules require CCPs and authorities to prepare for problems occurring, intervene early to avert a problem and step in when things have gone wrong. As part of the preparation and prevention element of the proposals, CCPs will have to draw up recovery plans, with measures to overcome any form of financial distress that would exceed their default management resources and other requirements under EMIR. Similarly, resolution plans must be drafted by authorities responsible for resolving CCPs in the event of their failure.

Early intervention is also a part of the proposed rules and CCP supervisors are granted specific powers to intervene where the viability of CCPs is at risk, before they reach the point of failure. In terms of resolution powers and tools, a CCP will be placed in resolution when it is failing or likely to fail when no private sector alternative can avert failure and when its failure would jeopardise the public interest and financial stability.

Finally, the proposals would instigate cooperation between national authorities, as CCPs are cross-border in nature. As such, 'resolution colleges' would be established for each CCP, containing all the relevant authorities including ESMA and the EBA.

These draft regulations will now be submitted to the European Parliament and the Council of the EU for their approval and adoption.

Risk Management

VM protocol launched

ISDA and IHS Markit have launched the ISDA 2016 Variation Margin Protocol on ISDA Amend. It automates the process for amending existing collateral documents or setting up new agreements in order to comply with new variation margin requirements going into effect on 1 March 2017.

The ISDA Amend platform enables counterparties to share questionnaires through a central online platform, removing the need for bilateral negotiations. Counterparties can make elections under the Protocol, including which regulatory regimes apply and which method they will use to make the required changes to their documentation.

ISDA Amend also automates the reconciliation of those questionnaires between counterparties. ISDA and IHS Markit will host an informational webinar that will outline the new ISDA Amend functionality for the Protocol on 1 December.

RMBS

RPL RMBS characteristics surveyed

Re-performing loan (RPL) RMBS issuance has remained steady since the launch of the first transaction, Towd Point Mortgage Trust 2015-1, last year. Moody's expects volumes in the sector to increase, given the steady supply of non-performing loans and RPLs from ongoing sales by the US Department of Housing and Urban Development (HUD), the GSEs and various banks.

As of 30 November, Moody's has rated 19 RPL securitisations from the Towd Point Mortgage Trust (TPMT), Mill City Mortgage Loan Trust (MCMLT), Citigroup Mortgage Loan Trust (CMLTI) and New Residential Mortgage Loan Trust (NRMLT) programmes. The agency notes that collateral characteristics underlying the deals vary significantly among the issuers.

NRMLT collateral has the strongest credit characteristics, according to Moody's, including high FICO scores, low loan-to-value (LTV) ratios and low percentages of previously modified loans. It is also more seasoned relative to the other three issuers.

Among deals with high percentages of modified loans, loans underlying MCMLT exhibit a strong payment pattern, with a larger percentage of loans 24 or more months current at issuance. However, while the aggregate collateral characteristics of TPMT, MCMLT and CMLTI transactions have remained relatively consistent, the collateral quality of NRMLT securitisations has declined over time, with a declining percentage of loans with 24 months or more clean pay history and an increasing concentration of previously modified loans.

Nevertheless, RPL securitisation performance to date has been strong relative to initial expectations, with 60-plus day delinquencies of less than 6% across the Moody's rated transactions. Five RPL deals - two from CMLTI and two from TPMT - have liquidated 16 loans in total since closing. Meanwhile, recent NRMLT transactions have seen high serious delinquencies shortly after closing.

"We expect loans backing RPL securitisations to continue to remain strong, largely owing to the loans' credit quality, a strong macroeconomic environment and the RPL-specific transaction's infrastructure to manage the loans - such as proactive servicers that focus on handling RPL, as well as transaction mechanisms for the disposition of non-performing loans and real estate owned properties," the agency observes.

All Moody's-rated RPL securitisations have either shifting interest or simple sequential structures. Recent TPMT and MCMLT deals also allow for a full turbo of excess spread to pay down the bonds.

TPMT and NRMLT transactions employ parties that oversee the primary servicer. NRMLT transactions allow for a smaller sample size in certain areas of its independent third-party due diligence review, due to the higher credit quality of its collateral pool. Finally, TPMT and MCMLT deals have assignment reserve and breach reserve accounts to address the repurchase of loans with missing note assignments and material document defects after their relatively short R&W sunset period of 12 months.

RMBS

SFR portfolio values on the rise

KBRA has affirmed each of the 151 ratings it has outstanding in the single-family rental securitisation sector, as part of a broader overview. The ratings are assigned to 26 single-borrower transactions - each of which is collateralised by a single loan - with the underlying loans having an aggregate balance of US$15.6bn, secured by 105,310 SFR properties.

The rating agency finds that property portfolio values have appreciated 14.8% since the issuance date of the respective transactions and 4.6% since May 2016. On average, portfolio net operating incomes (NOI) are 8.4% higher than the issuer's underwritten NOI and 4% higher since the last review in May 2016.

Contractual rental rates have also increased by 7.2% on average since issuance and by 2.63% since May. According to the agency's figures, trailing twelve-month vacancy rates are up from 4.4% in May to an average of 5.2%, but remain lower than the 5.5% reported in September 2015.

Furthermore, tenant retention rates have remained relatively stable, according to KBRA, with an average of 73.1% compared to 76% in May. Servicer reported operating expenses are up 7.1% year-on-year since November 2015, relative to an average rent increase of 4.3% during the same period.

The agency also reports that average current implied LTV has declined to 63.8% compared to the issuance LTV of 73.5% and implied LTV of 66.8%, as of May. Finally, it finds that NOI debt service coverage ratios are up since issuance from 2.43x to 2.63x, while NOI debt yields are up from 7% to 7.7%. This is also higher since the firm's last review in May, when NOI DSC was 2.60x and NOI DY was 7.2%.

RMBS

Mortgage originations 'have peaked'

The FHFA's decision to raise conforming loan limits for the first time in a decade has been welcomed by the mortgage industry, but Kroll Bond Rating Agency does not believe it will be a meaningfully positive factor for future residential mortgage loan originations. Rather, KBRA believes 2016 may have been the peak for lending volumes for the next several years.

Almost US$2trn has been originated this year. Whereas many market participants expect the change in the conforming loan limit to provide a further boost, Kroll believes the change is insignificant compared to rampant home price appreciation, with affordability having become a major issue in many markets.

Additionally, the impact of rising interest rates and widening credit spreads is a far larger negative influence on prospective mortgage origination volumes than the relatively small increase in the conforming loan limit, reckons the agency. The negative regulatory environment and low risk adjusted returns in the residential mortgage sector will also likely lead to more banks leaving the one-four family loan market.

The Mortgage Bankers Association predicts one-four family loan originations will reach around US$1.9trn for 2016, but decline 20% in 2017. The MBA also sees the coupon on a 30-year fixed rate mortgage rising from 3.9% in 4Q16 to 4.4% by 4Q17 and almost 5% by the end of 2018.

"With interest rates rising, the economic and financial environment for the US housing market is going to become progressively less hospitable. After nearly a decade-long recovery in both home price appreciation and mortgage lending volumes thanks to the FOMC, [Kroll] believes that the US housing sector is in the process of normalising - albeit from rate levels that are, in historical terms, still extremely low," says KBRA.

RMBS

Strong performance spurs SFR upgrades

The class B, C and D notes of Invitation Homes 2013-SFR1 have been upgraded by Moody's as a result of the steady build-up in equity in the properties backing the securitisation. IH 2013-SFR1 was the first-ever single-family rental securitisation (SCI 1 November 2013) and the move marks the first-ever upgrade for the segment.

Moody's has upgraded the class B notes from Aa2 to Aa1, the class Cs from A2 to Aa3 and the class Ds from Baa2 to A3. As well as the equity build-up, this has been driven by the operator's ability to maintain the operating expense ratio below original expectations while managing to increase contractual rents and keep vacancies and delinquencies low.

The securitisation has benefited from home price appreciation of over 20% since closing, which has reduced the Moody's LTV from 91.5% at closing to 72.8% now. In the same period, the expected recovery value has risen from US$524m to US$637m.

As of October, the trailing 12-month vacancy rate was 3.4%, compared to Moody's long-term vacancy rate assumption of 10%. The delinquency rate was just 0.5%.

Net operating income and cash flow have increased since closing. Net cash flow of US$34.8m for 2015 was 14.3% higher than the underwritten net cash flow of US$30.5m at closing.

Debt yield is up 10.8% from 6.8% in 2014 to 7.5%. DSCR has increased from 2.22x to 2.42x.

RMBS

STACR listings to be pulled

Freddie Mac will request that its STACR debt notes, as well as debt securities and mortgage securities, no longer be admitted to trading on the relevant markets in Luxembourg and Ireland. It expects to formally initiate the delisting process with the Luxembourg and Irish stock exchanges by 1Q17.

As a result of the listings on the European stock exchanges, Freddie Mac has become subject to the EU's Market Abuse Regulation (MAR). Freddie has evaluated its compliance obligations under MAR in light of its unique circumstances presented by its status as an entity in conservatorship that is supported by the US Treasury. It believes these circumstance will make ongoing compliance especially burdensome and costly.

RMBS

CIRT pricing detail provided

Fannie Mae is now making additional disclosures for its Credit Insurance Risk Transfer (CIRT) programme. Effective immediately, the GSE is disclosing pricing information for all of its deals dating back to 2014, when the CIRT programme began.

The additional information complements the disclosures that Fannie Mae has already been providing on its website, including copies of final insurance documents and loan-level disclosures of covered loans. The GSE's goal is to develop broad and liquid markets for credit risk that reduce taxpayer risk, minimise the impact to borrowers and lenders, offer an attractive investment option for investors in mortgage credit risk, and help to build a stronger housing finance system.

By the end of this year, Fannie Mae expects to have transferred US$23.9bn of risk on US$833.5bn of loans through its various credit risk transfer programmes. The CIRT pricing disclosures are now available on its website.

RMBS

Dynamic RMBS model introduced

DBRS has launched the UK RMBS Insight Model, which aims to offer a different way to forecast expected defaults and losses of UK residential mortgages. The tool combines a loan scoring approach and dynamic delinquency migration matrices to calculate loan-level defaults and losses.

The loan scoring model and dynamic delinquency migration matrices were developed using historical UK data for loan, borrower and collateral types. Using migration matrices to forecast defaults and losses allows for the potential delinquency status of each loan to be factored into the analysis, according to DBRS.

The agency anticipates that UK RMBS issuance will remain dominated by non-bank lenders, as banks continue to benefit from current Bank of England actions, such as the Term Funding Scheme announced in August. The agency believes that while current UK housing fundamentals are well supported by low interest rates and unemployment levels, downside risks are emerging, with the market showing signs of overheating. The effects of Brexit and inflation have yet to filter through to the market and uncertainty remains over their impact, it adds.

DBRS anticipates UK RMBS issuance to reach approximately €30bn (distributed issuance volume) in 2017, compared with an estimated issuance of €25bn (distributed volume estimate) in 2016. Issuance will likely be brought forward ahead of the triggering of Article 50, creating a strong first quarter to start the year.