Contents

Capital Relief Trades

Learning by doing

Issuers weigh capital relief opportunities and challenges

Capital relief trades, also called risk sharing trades, can provide issuing banks with several advantages. However, the transactions are not always well understood by the wider market and even those banks that are involved are learning lessons with each passing deal.

Nordea Bank dipped its toe into the capital relief trade space earlier this year, making a splash with its €8.4bn synthetic securitisation of SME and corporate loans back in Q3 (SCI 25 August). No assets were derecognised from Nordea's balance sheet, but the bank's CET1 ratio was enhanced and that freed up capital to engage in further lending.

"We became involved in the CRT space for two main reasons. Firstly, it is about sourcing capital at a cost efficient rate," says Jonas Bäcklund, head of credit structuring and execution, treasury and asset liability management, Nordea Bank. "Secondly, by investing in the process now when it is a choice rather than a necessity, we expand our toolbox, so that this option is open to us later on, should it ever be needed."

Alexandre Linden, senior transactor, asset finance and securitisation, BNP Paribas, notes that a key focus for his bank is on freeing up capital that can then be redeployed into more profitable business lines. He adds: "There are many reasons to become involved with risk sharing trades. Banks may want or need to reduce risk, or like us they may simply think that it is prudent to use risk sharing trades as a tool to improve their capital position in advance of the coming regulatory headwinds."

The €8.4bn deal was not only Nordea's first in the capital relief space, but the first from any Scandinavian bank. Bäcklund notes that a key strategy consideration for Nordea was to keep the transaction as simple, transparent and standardised as possible, so as to maximise investor interest. This approach also made sense, given the deal's timing, coming close on the heels of the UK's Brexit vote while wider markets were experiencing great uncertainty.

"It was also important that the structure of the deal would reflect our existing business, so we would not have to change the way we operate in order to issue it," says Bäcklund. "At €8.4bn, our deal was certainly a large one, but for us it had to be a large deal."

He continues: "We invested a lot of time and energy into making it work, so to take account of that and to account for the size of our balance sheet, this had to be a deal that really moved the needle. We believe in CRT, so we have taken it seriously."

BNP Paribas also made a significant impression with its own risk sharing trade, sized at around €5bn. Whereas these types of transaction used to be primarily about redeploying capital, Linden notes that there was more to BNP Paribas' thinking than just that.

"What was really important for us was not just looking at the benefit in the first year, but projecting the benefit over the whole course of the transaction," says Linden. "You must also balance the cost you pay to investors against your own capital cost."

While the issuers list several reasons for doing deals, the European Investment Fund provides an interesting perspective from the other side of the table. The EIF has been involved in CRTs for a relatively long time, seeing them as one way to meet its goal of providing capital to banks.

"We invest so that CRT originators can then lend onwards down the chain," says Georgi Stoev, structured finance manager, European Investment Fund. "Our objective is to stimulate further lending into the real economy, so we ask originators to lend to SMEs in return for our investment."

For the EIF, a key consideration is how much information is made available to investors. With other deal types there could be significant subordination, but the relative lack of subordination for CRT makes the availability of as much information as possible all the more important.

Issuing banks could structure the perfect trade, but if no investors are interested in buying it, there is little point. Therefore, it is vital to consult with investors to establish what kind of structures they want to see. However, sometimes it is the issuers themselves that need to be convinced of the value of a trade.

"A CRT is not a silver bullet or a miracle, so if you are structuring one, it is important to know what the costs and benefits will be. We have seen deals collapse because boardrooms feel they have not been provided enough information on these costs and benefits," says Stoev.

He continues: "It is typically human error which cases a deal to fail. Sometimes an originator will ignore the advice of its arranger and proceed with a structure that is not sensible, or an investor pulls out at the last minute. We typically serve as anchor investors and this provides comfort to originators that the deal is less likely to collapse if a co-investor pulls out the last minute."

While the EIF's relationship with other investors is limited, Stoev notes that one reported problem is where investors' requirements go in opposite directions. Fortunately for the EIF, it typically partners in syndicated trades with well-established players, who understand the business and with whom the EIF can align its interests.

Linden says: "The other challenge is getting investors comfortable with the pricing and the origination process. There is also a real challenge with IT systems, especially if you do a deal with multiple jurisdictions."

He adds: "Investors are all different. Some are credit-focused and want to study the names in the pool, while others are happy to rely on the internal credit metrics of the bank. At BNP Paribas, we have experience with both types of investors."

The best way to deal with all the different elements of uncertainty, says Linden, is simply to get the first deal done. He adds: "Once you have reviewed a first transaction with regulators and internal stakeholders, you have more certainty for future trades."

Bäcklund also identifies regulators as a potential hurdle. He concludes: "Regulatory uncertainty can be a major obstacle when you are trying to complete one of these deals. It requires diligence and courage to get a deal done."

JL

Coupon clippers

Euro CLO refi activity to accelerate

Refinancing activity is expected to accelerate in Europe in the coming year as the cost of funding encourages more CLO managers to employ the option. Anticipating the impending refinancing wave is deemed significant from both a market value and portfolio management perspective.

"Most European CLO 2.0 deals include provisions for refinancing within the documentation," says Angus Duncan, partner at Cadwalader, Wickersham & Taft. "It may not be an altogether particularly popular provision with investors for obvious reasons, but CLO managers and equity investors are taking advantage of these provisions in the documents."

Managers can refinance a CLO provided the deal has passed its non-call period and equity investors approve. A handful of European CLOs have been refinanced or reset year-to-date (see SCI's new issue database) and it is estimated that at least nine other deals are in the process of refinancing.

Refinanced deals typically offer lower coupons on investment grade tranches than when first issued, as well as increased equity returns. Ratings on investment grade tranches also tend to become more stable following the refinancing. Investors can - but are not obliged to - repurchase their bonds at the new, lower spread, or can be repaid in full.

Vincent Scalvenzi, director at Fitch, highlights that over the past two months there have been a number of new CLOs where the triple-A tranche has priced at around the 100bp mark. "This may be encouraging managers to re-price their CLOs, as many deals that closed in 2013 and 2014 priced the triple-A tranche at around 130bp-140bp," he says.

Avoca CLO X is one of the most recently refinanced European CLOs. The deal originally priced its triple-A tranche at six-month Euribor plus 140bp in 2013. The refinanced triple-A tranche priced at three-month Euribor plus 91bp earlier this month.

Resets tend to be more complex and are designed to extend the reinvestment period and final maturity of the CLO. In some cases, the deal documentation is changed, so that it conforms to 2016-vintage CLO standards.

"It's not a foregone conclusion that a deal will exercise its right to refinance, but as interest rates have dropped against the date of issuance, it has become likely that the option will be taken up," says Duncan.

S&P believes the secondary market should price in refinancing. Noting that current market pricing gives rise to a cost-effective and efficient method of both increasing equity returns and improving rating stability for rated tranches, it says investors need to be aware of this feature from both a market value and portfolio management perspective.

CLO analysts at JPMorgan believe that European CLO refinancing activity will increase from 2016 levels, given the refinancing and re-pricing trend in the European leveraged loan market and tight liability spreads. The average cost saving, they say, was 29bp on the completed European CLO refinancings in 2016, although they clarify that the overall cost savings achieved by a reduction in liability costs are mitigated by the addition of Euribor floors.

"The 'true' cost savings of a European CLO refinancing are likely lower than the 29bp average headline spread reduction observed in 2016," the JPMorgan analysts note.

European securitisation analysts at Bank of America Merrill Lynch, meanwhile, point out that pricing for lower mezzanine tranches is currently close to historical wides for CLO 2.0 deals. "Refinancing a deal in whole is likely to lead to wider spreads for these tranches, partly offsetting some of the gains from the tightening at the top of the capital structure," they note.

Bank of America Merrill Lynch estimates that the weighted average discount margin for a new issue deal is around 185bp, based on a typical new issue capital structure composed of all floating rate tranches and its estimate of current new issue pricing. "For 2013-2014 vintage deals (which have mostly exited their two-year non-call periods), we estimate weighted average coupon spreads of around 185bp-200bp in most cases, suggesting that the pricing benefits from refinancing entire deals are generally small for equity investors," the analysts add.

CLO refinancings and resets have been a dominant theme in the US CLO market during 2016, with a record number of deals completed. In the US, 44 CLOs have been refinanced year-to-date and there have been 35 US CLO resets. In this jurisdiction, the overall average liability cost savings of the refinanced deals was 16.8bp, according to JPMorgan estimates.

"We're currently seeing a large number of reset and refinanced CLOs, alongside regular new issues," comments Matthew Natcharian, head of Barings' structured credit group. "In some cases, we're seeing multiple deals from the same manager, one after another, with deals from 2012 through to 2015 being refinanced or reset."

Natcharian explains that a manager will be more successful at lowering their cost of capital when refinancing a deal with cleaner and better quality collateral. "If you had a 2014 deal with lots of energy exposure, for example, you'd have a harder time refinancing it than if you had a clean deal that performs very well," he adds.

Many US managers are keen to complete CLO resets before the risk retention rules come into force on 24 December, as they are considered to be akin to new deals by the regulators and therefore subject to risk retention requirements. It is anticipated that the number of CLO resets may tail off after this date.

US CLO resets have typically involved deals that originally priced in 2012 and 2013, and have generally seen an increase in weighted average liability costs by 7.7bp, the JPMorgan analysts suggest.

"We've seen some deals pay a slightly higher spread in order to reset - it is not always a case of lowering the cost of capital," confirms Natcharian. "A reset may be a little more expensive to do than a refinancing from a manager's perspective - and it may take more time and effort - but it does have the benefit of extending the life of the CLO, meaning that a manager would earn fees for a longer period of time."

Prices for US triple-A CLOs vary markedly. Kathleen Kraez, md at Barings, explains that pricing is very much dependent on a deal's profile.

"A CLO that has reached the end of its reinvestment period may price around 120bp, but for a deal with four to five years left, a triple-A would be more likely to price around the 140bp mark," she says. "Broadly speaking, triple-A CLOs currently price from 140bp to low 150bp. Refis could be lower, if they are shorter-dated."

As 2016 comes to a close, demand for US CLOs has remained strong, particularly in the fourth quarter. In many cases, investors are said to have been cut back in allocations of new deals. It may be for this reason that many investors are keen to repurchase the refinanced CLO bonds, even if they are at a lower coupon.

"A manager may take the opportunity to sell something that is being refinanced at par at a lower spread and buy something longer at a higher spread, but it depends on strategy," concludes Natcharian. "We take it on a case-by-case basis. But, in general, most investors keep hold of the bonds when they are refinanced."

AC

Structured Finance

Comfort zone

Investor interest in SFR muted, despite potential

A backdrop of declining homeownership in the US and a growing number of renters is driving growth in the single-family rental (SFR) securitisation market. However, limited volume, call risk and operational issues mean that the sector can be overlooked by investors, who remain more comfortable with RMBS and CMBS.

Earlier in the year Morgan Stanley RMBS analysts highlighted that the nascent SFR sector has been "one of the fastest growing sectors of the US housing market over the better part of the past decade". Meanwhile, SFR securitisation volume has nearly doubled in the last year, with approximately US$5bn in new issuance across 11 deals. Although this is down 30% on last year's total, the analysts project US$6bn of issuance in 2017.

Given the growth of the sector and the strong dynamics pushing it forward, some suggest that it may outperform non-agency RMBS in 2017. Sam Dunlap, senior portfolio manager of Angel Oak, sees the appeal, but is wary of certain disadvantages with SFR.

"Overall, I would disagree that SFR will outperform non-agency RMBS. The issue is that of call-risk in SFR, which limits the performance of the asset class, given most trade near par," he states.

He adds that while economic fundamentals like house price appreciation and low unemployment will benefit SFR by keeping delinquencies low, these factors will also have a similar beneficial effect on RMBS - particularly in the legacy non-agency space, which he believes will outperform SFR. "Call risk reduces the total return potential of a transaction and reduces premiums the bonds can achieve," Dunlap observes. "This risk will become more pronounced as more SFR deals will get called in future, as price appreciation of homes incentivises SFR issuers to call their deals. That will also drive voluntary prepayment in RMBS deals, but it's a bigger risk in general in SFR."

Adam August, fixed income professional at Tradex Global Advisory Services, says that the concept of SFR outperforming non-agency RMBS is limited by the difficulties in comparing the two sectors. "It's not as simple as a straightforward comparison. There are a number of different asset classes within non-agency RMBS. You have new issue, which is mainly prime jumbo, and of course legacy RMBS - there are significant differences."

He continues: "A far better comparison for SFR is CMBS; more specifically, agency CMBS. Currently we tend to prefer agency CMBS for a number of collateral and structural reasons."

Jeff Kong, partner at Tradex Global Advisors, agrees: "SFR is something of an RMBS/CMBS hybrid so you need investors who understand that structure. It also depends on where in the capital stack you want to invest."

He adds that while agency and non-agency RMBS have performed well recently, they've also tightened significantly - which might cause investors to look to newer pastures like SFR. But he notes that the wide spreads may only prevail in SFR currently due to its novelty.

Kong continues: "RMBS, both agency and non-agency, has had a great run post-crisis. SFR will likely come out on the wider side as it is a new asset. It has a lack of securitisation data and performance history as any new asset does. It has the potential to tighten because it is still emerging."

Dunlap agrees that it will take time for investors to find comfort with SFR transactions and this will be aided by more deals being completed, as well as more participants entering the sector. He clarifies: "Investor appetite for SFR will grow as issuance grows. It might also grow with more multi-borrower deals, which could drive issuance and with it investor appetite. I think the asset class is here to stay, but needs to become more consistent and alongside that we need more performance data."

Moody's has commented recently that deals could see improving credit quality as "SFR operators become more efficient in controlling expenses, such as turnover, marketing, property management, repairs and maintenance, and refinancings bring more seasoned assets into securitisations." However, operational issues - such as the complexity of managing many different properties across a range of geographies - remain concerning.

"Unlike a multifamily property, you might have a number of units spread across different neighbourhoods," August notes. "Operational issues, therefore, become a larger concern. Maintenance, for example, becomes a much harder task, as there isn't really centralisation. In a lot of ways, SFR is like looking at a rental business - there are lots of moving parts."

The housing fundamentals driving the growth of SFR could also be a boon for other property sectors. Homeownership figures and home buying rates have been in terminal decline in the last ten years, particularly among the under 35 age bracket.

Since 2000, the homeownership rate peaked at around 70% and now sits at 63%. Since 2005, the rise in renter households has outpaced owners by approximately a factor of 10, while owner households by contrast have been in negative annual formation since 2007 (except for 2013).

"These factors actually aren't necessarily a negative for us," Dunlap observes. "It could create a very nice supply/demand dynamic, as reduced issuance in RMBS, coupled with increased demand could continue to tighten spreads."

He adds: "In 2006, non-agency RMBS made up approximately 36% of mortgage origination. Now it stands at 0.5%. This reduction in homeownership is really driven by the contraction of credit availability - tightening of the credit box."

Dunlap says that more borrowers need to be able to access credit for homes, but is optimistic that a large number of renters will become home buyers in the future. "In terms of growth of renters, I think there are actually a tremendous number of millennials who will become householders in the next 10-20 years. It's a matter of time and a matter of loosening the credit box."

He continues: "At the moment, people might be denied mortgages due to a range of things like large student loan debt and a 20% down payment, but the credit box is loosening, resulting in a growth of non-prime non-QM. We think the credit tightening has gone way too far and it needs to loosen."

In terms of 2017, Dunlap notes that it is in the non-QM space he is focusing on. "We're very excited about the sub-prime non-QM sector. It's interesting in terms of a predicted boost in supply next year - possibly US$1bn - and it offers great relative value," he says.

August adds: "If you look at the size of the mortgage market, it's in the trillions. Issuance of mortgage-related securities has come down from around US$2.5trn in the pre-crisis years to around US$1.7trn year to date, but it's still a very large and resilient market. As the homeownership rate has come down, we've seen a rise in multifamily construction and SFR. Compared to the size of the US mortgage market, however, it's still pretty small - it's not moving the needle much."

Dunlap concludes: "SFR might be bit niche, but can work as part of a holistic investment approach and can build out a diversified portfolio. In general though, it needs to grow in terms of issuance before we start investing in it more heavily and feeling more comfortable with it."

RB

Secondary markets

Euro ABS/MBS ticks over

The European ABS/MBS secondary market continues to tick over.

As with the previous week it's been a solid if unspectacular start to this. BWICs continue to drive the action and trade well. For now, sentiment remains positive, albeit with some softening of tone in weaker peripherals, especially Portuguese names.

There are currently three BWICs on the European ABS/MBS schedule for today. The largest is an Italian and Spanish ABS and SME CLO mix due at 13:00 London time.

The four line €20m auction comprises: CLSME 2015-1 A, DRVES 3 A, SUNRI 2016-1 A1 and TOWCQ 1 A. Three of the bonds have covered on PriceABS in the past three months - DRVES 3 A at 100.73 on 14 October; SUNRI 2016-1 A1 at 100.3 on 18 November; and TOWCQ 1 A at 101.11 on 3 November.

Secondary markets

US CLOs stay strong

The US CLO secondary market remains strong.

"There's not a huge amount going on because of the time of year, but what is trading is trading pretty well," says one trader. "In fact we're trading more CLOs above par than ever before."

Investor appetite is now evident throughout the capital structure, the trader notes. "For a long time the bottom of the stack was lagging investment grade stuff, but we're now seeing a substantial bid for double-Bs as people realise it's the last place with significant yield potential. Investors are still differentiating between deals there, though - factors such as MVOC and manager skill are increasingly important the lower you go and they are getting closely analysed."

Overall, the trader concludes: "Market tone is very good. Consequently, we're just hoping people continue to trade for the next two weeks."

There are five BWICs on the US CLO calendar for today so far. The chunkiest is a three line collection of double-As due at 11:00 New York time.

The auction comprises: $15m AVERY 2013-2A B1, $4.25m CECLO 2013-18A B1 and $10m TPCLO 2013-1A A2. Two of the bonds have covered on PriceABS in the past three months - AVERY 2013-2A B1 at 98.79 on 17 October; and CECLO 2013-18A B1 at 96.77 on 15 September.

Secondary markets

Euro secondary unmoved

The Fed's announcement yesterday appears to have had little effect so far as the European securitisation secondary market resolutely sticks to recent patterns.

There continue to be pockets of activity across the ABS/MBS secondary market. Tone generally remains positive and spreads unchanged with the exception of Portuguese paper, which continues to edge wider.

However, CLOs are busier in comparison with a flurry of BWICs over recent sessions. Nevertheless, secondary spreads are flat this week after some tightening towards the end of last.

There are three ABS/MBS BWICs on today's calendar so far. The largest is an 11 line mixed RMBS list due at 15:00 London time.

The €189.3m original face auction comprises: AYTH M2 PH1, BCJAF 10 A2, CAJAM 2006-2 A2, E-MAC NL04-I B, GRIF 1 B, IMPAS 2 A, PARGN 12X B1B, RMAC 2005-NS3X A2C, UCI 10 A, UCI 14 A and UCI 15 A. Only IMPAS 2 A has covered with a price on PriceABS in the past three months - at 99 on 14 October.

Meanwhile, there are currently seven BWICs on today's schedule involving euro-denominated CLOs. The chunkiest is due at 14:00 London time and combines a triple-A and two single-As.

The list consists of: €4.4m JUBIL 2015-15X CNE, €8.5m TCLO 1X A and €5m TCLO 1X C. Only TCLO 1X A has covered on PriceABS in the past three months - at 100.066 on 30 November.

Secondary markets

US CLOs keep tight

US CLO secondary spreads are keeping tight as demand continues.

"Secondary is still very tight despite the continued flow of re-sets," says one trader. "In particular, the double-B rally continues but is still offering relative value and seeing strong demand."

The trader adds: "Overall we have created a market where people are happy to chase paper. As a result, secondary supply is light with not many sellers and those that are willing to enter the market are mainly small and are just profit-taking."

The strong tone looks set to carry on in to year end. "Re-sets will finish next week so there won't be a lot more supply but there's still a lot of cash on the sidelines," the trader says. "So, I expect to see the continuation of this third leg up for the immediate future."

There are five BWICs on the US CLO calendar for today so far. The largest is a mix of double-Bs and equity due at 13:00 New York time.

The nine line $24.23+m list consists of: APID 2015-21A SUB, CIFC 2012-3A SUB, CIFC 2012-3X SUB, CIFC 2013-2A B2L, CIFC 2015-1A E1, ICG 2016-1A D, OCT21 2014-1X SUB, SNDPT 2014-2A SUB and SNDPT 2014-3A E. Only APID 2015-21A SUB has covered with a price on PriceABS in the past three months - at 78.51 on 30 November.

Structured Finance

SCI Start the Week - 12 December

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

Pipeline
Pipeline entrants were mixed last week. Three ABS, four CMBS and two RMBS were newly announced.

The ABS comprised: A$306.9m FP Turbo Series 2016-1 Trust, US$100m Scala Funding Company Series 2016-1 and US$505.15m TCF Auto Receivables Owner Trust 2016-PT1. The CMBS consisted of: US$600m CSMC 2016-NXSR, US$271m DBWF 2016-85T, US$750m WFCMT 2016-C37 and US$233.33m VNDO Trust 2016-350P. Finally, US$225.75m COLT 2016-3 Mortgage Loan Trust and US$114m RCO 2016-SFR1 Trust rounded the pipeline entrants out.

Pricings
ABS deals dominated last week's pricings, but almost as many CLOs printed, the majority of which were refinancings. A handful of CMBS were also issued.

Auto ABS made a good showing last week, with the RMB3.86bn Bavarian Sky China 2016-2 Trust, US$109.77m CarNow Auto Receivables Trust 2016-1, US$1.05bn Ford Credit Floorplan Master Owner Trust A Series 2016-5, US$100m Honor Automobile Trust Securitization 2016-1 and £600m Motor 2016-1 pricing. The C$460m Canadian Credit Card Trust II Series 2016-1, US$195.2m Elm Trust 2016-1, US$44.5m HERO Funding Trust 2016-4B, US$709m Labrador Aviation Finance 2016 and US$500m Springleaf Funding Trust 2016-A were also issued.

Meanwhile, the CLO refinancings comprised: US$408.7m ALM Loan Funding 2013-7, €276.5m Avoca CLO X, US$460m BlueMountain CLO 2013-1, US$657.35m Dryden Senior Loan Fund 36, US$401.9m Eaton Vance CLO 2013-1, US$296.4m MidOcean Credit CLO 2012-1 and US$583.25m OZLM Funding III. The CLO new issues included US$601.66m Oaktree EIF III and US$510.75m Octagon Investment Partners 29.

US$132m The Bancorp Commercial Mortgage 2016-CRE1 Trust, US$819.3m JPMCC 2016-JP4, US$909m MSBAM 2016-C32 and US$280.75m SCF RC Funding I and II Series 2016-1 accounted for the CMBS prints. Finally, the sole RMBS to price was Sfr214m Swiss Home Loan Securities 2016-1.

Editor's picks
Improved flexibility?: KKR Credit's Pillarstone unit recently bolstered its senior team in Greece. The move reflects rising interest in the Greek NPL market, following the second appraisal of the country's economic adjustment programme...
Evolving analytics: FINCAD has recently incorporated MBS into its F3 pricing, valuation and risk analytics solution. SCI asked James Church, vp, product management and R&D at FINCAD, about the challenges of bringing MBS into a common valuation and risk solution, as well as his views on the current valuation and analytics landscape...
US CLOs robust: The US CLO secondary market remains robust. "Everyone is now back from the conference in California and the tone remains positive," says one trader. "Secondary spreads continue to be robust in the face strong new issuance..."

Deal news
• Freddie Mac has implemented the Common Securitization Platform (CSP) for certain single-family fixed-rate MBS. Dubbed Release 1, the development paves the way for Release 2, which will enable a combined Freddie Mac and Fannie Mae US$3.5trn market of to-be-announced (TBA) MBS.
• The £292.4m Towd Point Mortgage Funding 2016-Granite 3 has hit the market. The transaction represents the term take-out of the warehouses that were put in place to finance the acquisition of the assets by Cerberus.
• Monex Deposit Company is in the market with a rare public securitisation secured by precious metals. Dubbed Scala Funding Company Series 2016-1, the US$100m ABS is arranged by Piper Jaffray.
• Floreat Group is readying a securitisation programme focused on the aviation sector, with the aim of providing long-term fixed income investments for their institutional and high net-worth clients. The first issuance - of up to US$175m of notes - is planned for this month and will be backed by a portfolio of four Airbus A330s on leases to geographically diversified airlines.
• Westgate Resorts has reported damage at its Westgate Smoky Mountain Resort in Gatlinburg, Tennessee, following a wildfire that originated around 10 miles away in the Great Smoky Mountain National Park. The affected transactions are Westgate Resorts 2013-1, Westgate Resorts 2014-1, Westgate Resorts 2015-1, Westgate Resorts 2015-2 and Westgate Resorts 2016-1.
• S&P has placed the ratings of CAN Capital Funding Series 2014-1's class A and B notes on creditwatch with negative implications. A correction by CAN Capital Funding of the delinquency statuses of previously misclassified assets has triggered a rapid amortisation event.
• MBIA Insurance Corp has accepted a binding commitment letter from certain holders of its 14% fixed-to-floating rate surplus notes, pursuant to which they will provide senior financing of up to US$325m. Together with subordinated financing of US$38m from MBIA Inc and approximately US$60m from its own resources, the funds will be used to pay an anticipated claim on its insurance policy insuring certain notes issued by Zohar II 2005-1, which mature on 20 January 2017.
• A number of investors in the UK student loan ABS, Honours, indicated during a recent noteholder conference call their wish to form a committee to assist the issuer in dealing with the Consumer Credit Act non-compliance investigation (SCI passim). Accordingly, the issuer is proposing that one or more ad hoc committees - representing noteholders or individual classes of noteholders - be formed.
• The potential disposal of non-performing assets, as previously proposed by SMART SME CLO 2006-1, has been opposed by noteholders who assert that it would be in breach of the terms of a CDS between the issuer and swap counterparty, Deutsche Bank Frankfurt. As well as problems with the CDS, the noteholders have identified issues with the bank account agreement.

Regulatory update
• The European Parliament's Economic and Monetary Affairs Committee (ECON) has adopted the European Commission's securitisation package, with a number of amendments. Most significantly, risk retention requirements for vertical retention has been increased to 10%.
• A new R&W form and a common communication platform between investors and issuers proposed by SFIG are 'credit positive' for RMBS, according to Moody's. The ideas are outlined in SFIG's latest RMBS 3.0 fifth edition green papers.

Capital Relief Trades

Second Salisbury prices wider

Lloyds has closed a capital relief trade referencing a £2.1bn granular portfolio of UK SME loans. The 10-year Salisbury II Securities 2016 deal pays Libor plus 12%, above the plus 10.25% print of the lender's previous Salisbury Securities 2015 transaction.

The £789.4m 2015 deal was also a granular synthetic SME securitisation. The 2016 deal, however, is more diversified, with 40% exposure to the real estate sector (as opposed to 100%). The rest of the portfolio is exposed to the healthcare sector (20.1%) and farming and agriculture (18.1%).

Rated by Fitch, the 2016 transaction comprises: £1.18bn triple-A rated class A notes; £34.1m triple-A class Bs; £90.3m double-A class Cs; £17m double-A class Ds; £22.1m double-A minus class Es; £47.7m single-A plus class Fs; £13.6m single-A class Gs; £13.6m single-A minus class Hs; £51.1m triple-B plus class Is; £11.9m triple-B class Js; £20.4m triple-B minus class Ks; and £49.4m double-B plus class Ls. There is also an unrated class M note sized at £153.3m.

The portfolio comprises two different sub-pools: loans to income-producing real estate companies that the originator assesses through a qualitative valuation that divides loan exposure in different slots; and loans granted to SMEs in different industries that the originator assesses through its BDCS rating system. For the former sub-pool, Fitch assigned a WA one-year probability of default of 3.4%; for the latter, it assigned a WA one-year PD of 3%.

The transaction features a three-year replenishment period, subject to conditions intended to limit additional risks. The replenishment period will be interrupted if certain performance triggers are breached.

Lloyds has bought protection under the CDS relating to the equity risk position. Regarding the drivers behind the transaction, market sources point to the lender's need to reduce its overall UK SME exposure. Lloyds has been one of the biggest beneficiaries of the Bank of England's funding for lending scheme, aimed at boosting lending to UK SMEs, and has been consistently ranked as one of the leading lenders for UK SMEs.

The sources suggest that the deal was not an easy sell to investors. Lloyds is an attractive issuer, given its status as a Tier One bank, as well as its capital management, consistent structures, conservative underwriting risk, delivery efficiency and fondness for syndicated deals - factors which explain the transaction's large size. At the same time though, the deal is long-dated, which means that investors are exposed to significant spread risk.

One source explains: "If that price goes to Libor plus 13%, then you can suffer a 1% loss for each year remaining. So there is significant sensitivity to market spread."

The latest Salisbury deal will be followed by another capital relief trade referencing agricultural loans, which Lloyds is expected to close this week. UK-based investors are said to be more comfortable with this portfolio, given its history of negligible losses, so it is expected to price tighter in the single-digits.

Lloyds' de-risking of these loans is believed to be driven by the fact that the portfolio attracts significant RWAs, since it is not under the IRB approach, given the lack of historical losses with which to build IRB models.

SP

CDS

Contagion risk examined

The latest Office of Financial Research working paper analyses counterparty exposures in the credit default swap market and examines the impact of severe credit shocks on the demand for variation margin. In contrast to the prevailing view that CCPs constitute a major source of systemic risk, the study suggests that many CCP members contribute substantially more to contagion as large net sellers of CDS protection.

The OFR paper examines the potential contribution to network contagion of the 26 ICE Clear Credit members, as well as the potential contribution of the major non-members. The bureau employed the US Federal Reserve's comprehensive capital analysis and review (CCAR) shocks and estimated their impact on the value of CDS contracts and the variation margin owed.

The study finds that network exposures can significantly increase the amount of contagion when the transmission factor is greater than one. Furthermore, it suggests that many members and some non-members contribute substantially more to contagion than the CCP, despite their being peripheral in the network.

"Under the new policy in which all counterparties to bilateral CDS transactions must post initial margin, the total amount of contagion is substantially reduced and so are the marginal contributions of individual firms. Nevertheless, the CCP still contributes substantially less to contagion than do some members (and some non-members)," the OFR suggests.

The bureau adds: "Our analysis suggests that more attention should be paid to firms that are very large and have highly unbalanced CDS positions, whose failure can trigger large systemic losses, even when the CCP does not fail. It also highlights the key role of liquidity buffers in coping with large and sudden demands for variation margin that result from a credit shock."

Demands for variation margin must be met over very short time horizons. When such demands exceed a firm's initial margin and other ready sources of cash, the firm may fail to pay its counterparties promptly. This shortfall can become amplified as it cascades through the network.

The OFR notes that the study does not encompass the full range of shocks to which firms may be exposed, nor does it include interest rate swap exposures, which represents a substantially larger notional than the CDS market. "In this sense, our analysis is somewhat conservative. Under a CCAR shock, firms may be subjected to simultaneous payment demands over multiple lines of business, increasing the stress on their resources. In spite of these limitations, the framework we propose is general and can be applied to many different settings where stresses are transmitted through the network of exposures," it concludes.

CS

CMBS

Houston exposure eyed

Morningstar Credit Ratings added seven US CMBS loans backed by Houston collateral to its watchlist in November, totalling US$263.5m in UPB, which was over two times the balance added for the second-most active market - Washington, DC. Over the past 12 months, the balance of Houston loans on the agency's watchlist has grown by more than 50% to US$748.1m, moving Houston up to the fifth-largest watchlist exposure from fifteenth in November 2015.

Much of the increase can be attributed to 2007 loans - whose watchlist exposure more than tripled - and 2013 loans, which saw a 188.2% increase over the past 12 months. Six of the seven loans added to the Morningstar watchlist have loan-to-value ratios greater than 90%, including five with LTVs above 100%.

These additions come at a time when the energy industry is under pressure due to the volatility in US crude-oil prices, which has had a significant effect on the Houston economy and commercial real estate, particularly the office sector. Indeed, five of the loans recently added to the watchlist are backed by office collateral.

The newly watchlisted loans includes the US$80m Three Westlake Park (securitised in GSMS 2014-GC20), which is only 59% occupied since a major tenant - BP Amoco Corp - vacated at its November lease expiration. However, Morningstar doesn't view the loan as a near-term default risk since the property can still cover its debt service, as ConocoPhillips will continue to pay rent for an additional three years.

While also not a near-term default risk, the US$160m 717 Texas Avenue loan (MSC 2007-IQ15) was watchlisted due to the sizable amount of available space for sublease or direct lease ahead of its July 2017 maturity.

Meanwhile, about one-third of the 10333 Richmond property (a US$34.7m loan in JPMBB 2014-C22) is available, up from the reported 22% vacancy in June. Morningstar believes that this loan represents elevated default risk, as the debt service coverage ratio may fall to below break-even from 1.14x in June. In addition, the property's value has slipped since issuance to US$27.6m, which yields a concerning LTV of 125.7%.

Similarly, the 801 Travis property (US$28.6m loan in JPMBB 2013-C17) has about 38% of its space available for lease and cashflow is expected to decrease in 2017. The US$14.6m 9801 Westheimer Road (WFRBS 2012-C9) recently lost its largest tenant and high lease rollover is expected next year, limiting the borrower's ability to secure take-out financing by the loan's November 2017 maturity date without additional equity.

Morningstar also highlights weakness in other property types, as job losses from energy-related sectors weigh on demand. The final two loans added to its watchlist last month were secured by multifamily properties: the US$13m Champions Centre Apartments (CSMC 2007-C4), with a US$100,000 value deficiency; and the US$5.7m Colonial Oaks At Westchase (FREMF 2011-K14), with a US$1.8m value deficiency.

CS

NPLs

NPL ABS volumes gauged

Current global non-performing loan assets could translate to potential securitisation volumes of US$270bn-US$900bn, assuming a 15%-50% discount to the par value, according to S&P estimates. However, given that new NPLs may only arise as institutions raise capital to absorb losses, the figure could be much larger.

NPL securitisations have historically involved mortgage assets. However, with the recent commodities bust and increasing corporate leverage against the backdrop of slowing economies, commercial loans are emerging in NPL pools in China and parts of Europe.

"Commercial loan analysis and workout can be very volatile, as it depends on the more complicated corporate entities' bankruptcy/restructuring process, more dynamic industry environments, and - in the case of the recently troubled resource sector - the much more unpredictable price of the underlying commodities," the agency observes.

Among the nine Chinese NPL securitisations issued in 2016, for example, seven related to commercial loans extended to corporate or trade finance obligations. The inherent volatility of such loans' value was reflected in the large differences of loan-by-loan appraisal value within a transaction's portfolio, S&P says. The asset transfer price of an NPL securitisation backed by commercial loans typically had a 50%-80% discount from asset book values.

Despite the challenges in commercial loans, the Chinese NPL market has been successful in selling loans from one bank to other investors in the inter-bank bond market, a resolution that brings in capital market resources to the banking system. It also engenders more transparent loan valuation, as the market follows these workouts and creates better recovery assumptions for pricing further loan pools.

Meanwhile, Italian banks have accumulated record high non-performing exposures (NPEs) since the onset of the financial crisis, with an outstanding balance that is nearly five times higher than the amount registered in 2007. Per the EBA's definition introduced in 1Q15, the gross domestic NPE of the Italian banking system totalled about €331bn as of end-June 2016, equivalent to 19.5% of total loans of the banking system. In this NPE stock, loans granted to enterprises accounted for €259bn.

The worst-performing portion of these assets - known as 'sofferenze' - has already defaulted and equalled €197bn, as of June 2016 (representing around €87bn, net of provisions, according to S&P's estimate). NPEs also include loans unlikely to pay in the future ('incagli' loans) or currently past due (more than 90 days in arrears, such as 'scaduti', 'sconfinati' and 'ristrutturati'), which likely require a lower level of provision.

Given the large potential amounts of issues, S&P expects GACS, as well as the Atlante and Atlante II funds to help make Italian NPL securitisations more attractive to a broader base of investors. Specifically, Atlante II is expected to purchase mezzanine tranches of the securitisation that Monte Paschi di Siena will originate to sell its overall NPL portfolio, accounting for approximately €27.7bn.

The agency also expects to see more financial institutions dispose of loans directly to funds, following UniCredit's recent transaction with PIMCO and Fortress (SCI 14 December). "Direct disposals quickly eliminate NPLs from an institution's balance sheet and allow the new purchaser to pursue a variety of recovery strategies," it notes.

Given the potential for GACS issuance and private issuance of NPLs from Italy, S&P anticipates €10bn-€40bn of issuance in 2017, depending upon market conditions.

CS

RMBS

Inaugural online RMBS prepped

SoFi is in the market with its inaugural RMBS transaction, dubbed SoFi Mortgage Trust 2016-1. The US$168.79m deal comprises 36 classes of mortgage-pass through certificates backed by prime jumbo mortgage loans originated via SoFi's online lending platform.

Fitch and KBRA have issued preliminary ratings on the transaction, with both agencies rating the US$84.11m class 1A6, the US$28.03m class 1A8, the US$11.81m class 1AMF, the US$23.49m class 2A6, the US$7.83m class 2A8 and the US$3.29m class 2AMF initial exchangeable certificates triple-A. Additionally, six notional classes of senior certificates are given provisional ratings by both agencies of triple-A.

Both Fitch and KBRA have also issued preliminary ratings on the US$3.97m class B1 notes as double-A, the US$2.63 class B2s as single-A, the US$1.18m class B3s as triple-B, the US$930,000 class B4s as double-B, the US$760,000 class B5s as single-B and the US$1.01m class B6 notes are unrated.

The deal is backed by 270 prime residential mortgage loans, consisting entirely of fully-amortising, fixed-rate mortgages. The pool's weighted average loan age is eight months, and 34 loans (10.9%) are seasoned between 13 and 18 months. The entire pool was originated by SoFi and will be subserviced by Cenlar FSB, with the mortgage pool split into two groups. Group 1 comprises loans with amortisation terms of approximately 30 years (78.2%) and Group 2 being 15-year amortising loans (21.8%).

Both ratings agencies note the strong collateral attributes of the pool, with KBRA stating that "the credit quality of the loan collateral and related borrowers is among the most favourable across the universe of 63 KBRA prime jumbo securitisations that were rated from 2012 to 2016". Fitch similarly highlights that the deal benefits from low leverage and adequate liquid reserves and highlights the weighted average FICO score of 777 and an original combined LTV ratio of 56.5% as credit positives.

However, both agencies highlight the geographic concentration of loans as a credit negative for the deal, with a large number deriving from California (78%). Fitch also points out the earthquake risk in this area, stating that the US Geological Survey estimates the chance of a 6.7 magnitude (or greater) earthquake occurring within the next ten years to be roughly 15% for the area within 50 kilometers of the most concentrated zip code in the pool.

However, the agency adds that based on the historical experience of loans affected by the Northridge earthquake in 1994, it believes investment grade classes will likely be protected against a similarly sized earthquake due to increased credit enhancement and the unusually strong credit quality of the borrower.

RB

ABS

Firm hires aviation pro

Cross Ocean Partners has hired Brandt Wilson as partner and head of asset investment strategies. He will be based in Cross Ocean's Greenwich, Connecticut office.

Wilson has been brought in as part of a new hard asset class investment strategy, initially focusing on global aviation opportunities. Prior to Cross Ocean, he was a senior md at Castlelake, where he was co-head of the firm's global aviation investment strategy. Before that, he was in the senior management team at Bank of America Merrill Lynch, where he oversaw numerous hard asset investment activities, with an emphasis on aviation.

Structured Finance

Trust services to be sold off

Capita is set to dispose of the majority of its Capita Asset Services (CAS) division and a small number of other businesses that no longer fit its core business strategy. The move follows a review of the firm's management structure, operating model, business portfolio and leverage, with the aim of strengthening its position.

Specifically, the group of businesses within the Capita Asset Services division that deliver shareholder, fund, debt and banking solutions, as well as trust and corporate services will be sold. However, the UK retail banking and mortgageservices business process management operations - which currently sit within this division - remain core to Capita's strategy and will be transferred to a new private sector partnerships division.

The sale of the identified CAS businesses is anticipated to complete during 2H17, subject to a number of regulatory clearances. Fitch says that the sale will not have an immediate rating impact on CAS ratings, as it is unlikely to result in a change to the support provided by Capita to the relevant servicers in the short- to medium-term. But the agency notes that it is completing a full operational review of Capita Mortgage Services and expects to take a rating action over the next two months. While the sale announcement will be taken into consideration in its review process, it is not expected to have a material impact on the rating outcome.

Structured Finance

Asset finance firm bolstered

Norton Folgate has been rebranded as Amicus Asset Finance. Concurrently, the firm has recruited Jeremy Guilfoyle as coo, with a remit to drive structural transformation and innovation across the business. A qualified lawyer, Guilfoyle joins from Paragon Bank Business Finance, formerly Five Arrows Business Finance and State Securities, where he held various senior management positions over 16 years.

Structured Finance

Asset manager inks takeover

Amundi has acquired Pioneer Investments from UniCredit for €3.6bn. As part of the deal, Amundi will forge a long-term, 10-year partnership with UniCredit for the distribution of asset management products.

Pioneer has €222bn in AUM and has a long track record and expertise in asset management, with a similar profile to Amundi in terms of management expertise and geographic presence. The acquisition will make Amundi one of the largest asset managers in Europe and the eighth largest in the world, with €1.27bn in AUM.

This acquisition has received support from the boards of Amundi and UniCredit and is subject to the usual finalisation conditions from regulators and competition authorities. It is expected to be completed in 1H17.

Structured Finance

Italian expertise enhanced

Tikehau Capital has appointed Andrea Potsios as senior advisor to reinforce its Italian team's expertise and accelerate distribution in the country. Based in the firm's Milan office, he will work alongside senior advisor Ignazio Rocco di Torrepadula and Italy head Luca Bucelli.

Potsios has 27 years of experience in investment banking and capital markets, most recently as vice chairman of Nomura International's global markets division. Before that, he was md and head of Lehman Brothers International's fixed income division. He has also worked at Barclays, Merrill Lynch, Banque Bruxelles Lambert and Cooper & Lybrand.

Structured Finance

EM team bulks up

Nomura has hired Dimitrios Vlachos as an associate for its emerging markets division. He joins the structured credit trading team and will be based in the London office.

Vlachos previously worked for Credit Suisse in the emerging markets fixed income trading division, working in credit derivatives.

Structured Finance

Solutions group formed

CST Trust Company has entered the Canadian custody market as a National Housing Act (NHA) MBS custodian and title custodian, following its qualification last week by the Canada Mortgage Housing Corporation (CMHC). As the first new entrant to the market in 30 years, CST aims to transform the documentation and tracking processes around Canada's NHA MBS programme through state-of-the-art technology and automation.

While adhering to CMHC requirements, CST says it will also create a digital registry of Canadian mortgages. This electronic repository will track beneficial ownership of every mortgage from origination through its sale to investors and subsequent securitisation.

The aim is to provide issuers, originators and investors with easily searchable, on-demand access to specific asset information. The new technology should also eliminate delays and potential inaccuracies inherent in manual attestation, in which custodians certify that documentation is complete, as well as in the storage of physical documents off-site.

Both a top-three Canadian bank in mortgage securitisation and an IIROC dealer have selected CST as their new mortgage custodian, becoming the first bank and dealer to digitise their NHA MBS mortgage records.

CST has also launched a new structured financial services group, offering structured financial solutions to capital markets, ranging from trustee to customised administration functions on an advisory basis. The newly appointed head of the division is svp Frank Turzanski, who brings more than ten years of experience in structured finance to the role. He previously held progressively senior positions at other Canadian financial institutions.

Structured Finance

Replacement chiefs named

Och-Ziff Capital Management has named Alesia Haas cfo and David Levine chief legal officer. Current cfo Joel Frank and chief legal officer David Becker have each decided to retire.

Haas previously served as cfo and head of strategy for OneWest Bank. Her prior experience includes senior finance, investment and strategy roles with Merrill Lynch and General Electric.

Levine has been a senior member of Deutsche Bank's legal team for the past 15 years, most recently serving as global head of litigation and regulatory enforcement. Prior to joining Deutsche Bank, he spent eight years at the US SEC in Washington, DC and New York, including serving as the chief of staff.

Frank will stay with the firm as a senior advisor to ensure a seamless transition and retire at the end of June 2017.

CMBS

CRE group continues expansion

Colliers International Group (CIG) and Colliers Parrish International (CPI) have signed a merger agreement. CPI is the largest independently owned Colliers affiliate in the US, providing investment sales, lease brokerage, capital markets, valuation and advisory and also property management services.

"Integrating CPI with our existing operations in Northern California significantly increases our scale and coverage, allowing us to seamlessly and effectively serve our clients in this important region," says Colliers International president, US brokerage, Martin Pupil. "As well, adding another market leader in Nevada extends our best in class capabilities into this important adjacent market."

CIG has made another five acquisitions over the past year, including ICADE Asset Management and ICADE Conseil at the end of Q3 (SCI 3 October). The CRE firm believes that these acquisitions further integrate and strengthen its service platform, reinforcing its business operations in the western US and nationally.

Insurance-linked securities

TSM simplifies management structure

Tsuyoshi Harigai has become sole ceo at Tokio Solution Management, following the departure of Susan Lane. The pair were announced as co-ceos last year, taking up those positions in January (SCI 13 November 2015).

Lane has now left the company, which has taken the opportunity to simplify its management structure. Harigai has been part of the Tokio Marine Group since 1995 and joined the board of Tokio Solution in 2013.

Elsewhere in the management team, Butch Agnew will remain vp for ILS portfolio management. Dave Courcy will remain vp for structuring and finance.

Insurance-linked securities

ILS firm makes exec changes

ReannaisanceRe has promoted Sean Brosnan to svp, cio, while Aditya Dutt, president, will take on the additional role of treasurer. Todd Fonner, cio and treasurer, is to leave the company.

Brosnan has been with RenaissanceRe since 2004 and was most recently md for investments of Renaissance Services of Europe and ceo for Renaissance Reinsurance of Europe. Prior to this, he was head of portfolio construction at Irish Life Investment Managers.

Dutt's new responsibilities will include investor relations and corporate development. Dutt will continue to lead the company's ventures unit.

Fonner has decided to leave the company to pursue other opportunities, effective 31 March 2017.

Risk Management

CME management beefs up

CME Group has appointed Kim Taylor and Julie Winkler to new roles on its management team. The pair will report to CME Group chairman and ceo Terry Duffy.

Taylor will serve in a newly created role as president, clearing and post-trade services. She most recently served as president, global operations, technology and risk since 2014.

Winkler will serve as the company's chief commercial officer, replacing Bryan Durkin, who assumed the role of president last month. She previously served as senior md, research and product development since 2014.

RMBS

RMBS trader accused of fraud

A federal grand jury in New Haven has returned an indictment charging former Cantor Fitzgerald bond trader, David Demos, with six counts of securities fraud. Demos was a trader and md at Cantor Fitzgerald from November 2011 until his employment was terminated in February 2013.

Demos is accused of defrauding customers by fraudulently inflating the purchase price at which Cantor Fitzgerald could buy a RMBS bond to induce customers to pay a higher price for the bond, and by fraudulently deflating the price at which Cantor Fitzgerald could sell a RMBS bond to induce customers to sell bonds at cheaper prices. It is alleged that Cantor Fitzgerald and Demos profited illegally, with victims sustaining millions of dollars of losses.

The victims of this alleged scheme include asset managers and firms affiliated with or subsidiaries of recipients of funds from the US government's Troubled Asset Relief Program (TARP). If convicted of the charges in the indictment, Demos faces a maximum term of imprisonment of 20 years on each count.

The case has been assigned to US District Judge Alvin Thompson in Hartford.

RMBS

Executive promotions inked

PennyMac Mortgage Investment Trust has announced changes in the roles of six executive officers in conjunction with organisational changes at PennyMac Financial Services, its manager and service provider. The changes are effective from 1 January 2017.

Under the reorganisation, chairman and ceo Stanford Kurland will assume the role of executive chairman, while executive md, president and coo David Spector will become president and ceo. Additionally, senior md and chief institutional mortgage banking officer Doug Jones will become senior md and chief mortgage banking officer; senior md and cfo Anne McCallion will become senior md and chief enterprise operations officer; senior md and chief business development officer Andrew Chang will become senior md and cfo; and senior md and chief ALM officer Daniel Perotti will become senior md and deputy cfo.

All other existing executive officers of the REIT will retain their current titles and roles.

ABS

UK SLABS ratings suspended

S&P has suspended its credit ratings on Honours series 2's class A1, A2, B, C and D notes. The rating agency comments that the suspension is due to the lack of timely receipt of sufficient information of satisfactory quality.

Although the servicing transfer was completed in January 2016 and servicing continued, S&P has not received recent annual repayment cohort performance data that it specifically requires to complete cashflow analysis. Although it says that the timely receipt of this information may eventually resume, the timing is unknown and so it has therefore suspended all of its ratings on the transaction.

On 28 November, the rating agency placed on negative creditwatch its ratings on Honours series 2's class A1, A2, B, C, D and E notes, due to the 31 October 2016 notice indicating that there is a significant increase in redress costs for Consumer Credit Act non-compliance issues (SCI passim). S&P adds that it is unable to resolve this creditwatch placement without having the annual repayment cohort performance data.

The agency adds that until it receives timely and reliable information and concludes that it will be provided on an ongoing basis, its ratings on the transaction will remain suspended. While it has communicated with the servicer about such data, it is reliant on the previous servicer to supply the information and is therefore unable to provide definitive timeframes for its provision.

If the company is able to provide sufficient information for S&P to make a rating decision within 90 days, it will assess the information to determine a rating outcome. The agency concludes that if the level of information remains insufficient or is not of satisfactory quality, it will subsequently withdraw the ratings.

ABS

Euro appreciation 'SME negative'

Appreciation of the euro against the pound is slightly credit negative for Italian, Spanish and Belgian SME ABS, says Moody's. The pound lost 15% against the euro between September 2015 and September 2016 and is expected to remain weak next year.

Companies that rely on exports to the UK, or on UK tourists, will suffer as a result of the stronger euro. Moody's notes that regions from which it rates SME ABS rely on the UK for exports more than for imports, making the net impact of the pound's depreciation a negative one.

While Italy, Spain and Belgium are not too strongly dependant on the UK, Spanish SME ABS are most at risk because of the importance of UK tourists for that market. On average, SMEs active mainly or partially in the tourism sector represent 3.2% and 7.6% of the underlying Spanish ABS SME portfolios respectively.

The UK accounts for up to 8.8% of exports from Italy, Spain and Belgium, the three largest continental SME ABS markets. It accounts for up to just 3.9% of imports in those regions.

ABS

FFELP SLABS trends to continue

The slow repayment rates of FFELP student loan ABS loans will continue in 2017, says Moody's. Additionally, more servicers are expected to exit the market.

The continued slow repayment rate will be driven primarily by the large number of FFELP borrowers enrolled in repayment plans that push loan payoff dates further into the future. Credit performance should improve as borrowers make career progression and enjoy lower rates of unemployment than younger graduates. Growing usage of the debt-repayment plans will also contribute to improved FFELP loan performance.

There is not expected to be much change in FFELP ABS capital structures, which should continue to have a senior tranche only and to have turbo payment features. However, rehabilitated loans could make up a larger share of new deals as FFELP issuers hunt for collateral to securitise.

Sponsors are expected to continue to support existing transactions through new features and amendments, for example by extending final maturity dates on tranches at risk of default owing to slow loan payment speeds by amending transaction documents. Sponsors will also continue to exercise optional clean-up calls by repurchasing remaining loans and paying off outstanding notes when the pool balance reaches a certain threshold.

Servicing transfers are expected to continue, with the servicing of some FFELP ABS transactions shifting to larger and stronger entities, which Moody's sees as a credit positive. This will happen as a result of a number of servicers shifting their business strategies and exiting the FFELP market.

Borrowers are expected to continue to make wide use of debt repayment plans. Moody's notes that the combined percentage of FFELP loans in deferment, forbearance and income-based repayment partial financial hardship (IBR PFH) will remain high in 2017.

Lastly, defaults should also continue to decline as brighter economic prospects for FFELP loan borrowers, as well as the rising use of IBR PFH, will lead to continued declines in default rates. However, these lower defaults will result in a continued slowdown in the payment speed of FFELP ABS.

ABS

Esoteric ABS forecast issued

Continued slow economic growth should have a positive effect on US commercial and esoteric ABS sectors in 2017, including railcar lease, fleet lease and mobile phone financing securitisations, says Moody's. Modest global economic growth will also help aircraft securitisations and perhaps even restaurant whole business securitisations, although anaemic growth in global trade will be a negative for container lease ABS.

Aircraft ABS transactions will be supported by solid airline fundamentals. Steady - albeit lower - growth in global airline passenger traffic, coupled with continuing demand globally for passenger aircraft is expected to support the credit performance of aircraft ABS.

Container lease ABS will spend 2017 continuing to grapple with the negative factors that have held it back in 2016 (SCI passim). Container prices and lease rates are at least steadying, but weak global trade growth and persistent overcapacity at container shipping lines are expected to continue to weigh on the sector.

The mobile phone financing ABS market, which has developed this year, should expand as US economic growth helps borrowers to remain current on payments due on their financing contracts. However, increased competition for customers could drive down deals' credit quality if carriers add weaker collateral to securitised pools of contracts after deal closing, or if they issue new ABS backed by weaker collateral.

There are negative consumption trends for some tobacco settlement revenue ABS. Should declines in US cigarette shipments continue, then participating states will receive lower payments from tobacco manufacturers next year and that is credit negative for some bonds in the sector.

Real estate price appreciation is anticipated to benefit PACE assessment securitisations, while further solar loan ABS are also believed to be on the horizon. Moody's expects that growing origination of solar loans is likely to result in issuance of residential solar financing ABS that are backed by loans, rather than leases and power purchase agreements.

Rental car ABS will be supported by steady credit quality of major rental car companies. Favourable rental car industry fundamentals are expected to help the sector perform steadily. Fleet lease ABS will also benefit from US economic growth, with delinquencies and losses on underlying pools remaining low.

Finally, wireless carrier spending is expected to sustain cashflows into wireless tower ABS, which is a credit positive trend. Moody's believes carriers will make further investments in their network infrastructure, which is a positive trend for wireless tower-backed securitisations.

ABS

CNL expectations recalibrated

Moody's has taken rating actions on four TCF Auto Receivables Owner Trust transactions issued in 2014 through 2016, affecting approximately US$944m of ABS bonds. The move reflects a change in the calculation of net loss from that used in previous ratings for the transactions.

Specifically, the agency has upgraded one security, downgraded two securities and affirmed the ratings of 17 additional securities issued by TCF Auto Receivables Owner Trust 2014-1, 2015-1, 2015-2 and 2016-1. The transactions are sponsored and serviced by Gateway One Lending and Finance.

Moody's says it has learned that the servicer does not include additional servicer expenses in its reporting of net loss, which would reduce liquidation proceeds for defaulted receivables and therefore increase losses. Consequently, these expenses have been included in this latest analysis, resulting in an increase in Moody's calculation of lifetime cumulative net loss (CNL).

The increases in CNL expectations for the 2014-1, 2015-1 and 2015-2 transactions - to 3% from 2.50%, 4% from 3.25% and 3.75% from 3.25% respectively - were also due in part to worsening performance. The upgrade and rating affirmations primarily resulted from the build-up of credit enhancement, due to the sequential pay structures, in addition to non-declining overcollateralisation and reserve accounts.

For the 2016-1 transaction, the inclusion of additional servicer expenses led to an increase in CNL to 3.50% from 3% and an increase in the Aaa level to 16.50% from 15.50%. This resulted in downgrades on the class B and C notes.

Structured Finance

ABSPP external managers cut

The ECB's governing council has decided that the ABSPP should now be fully implemented by national central banks, rather than relying on the support of external managers. This is a change which was planned when the programme was first launched.

As of 1 April 2017, Nationale Bank van België/Banque Nationale de Belgique, Deutsche Bundesbank, Banco de España, Banque de France, Banca d'Italia and De Nederlandsche Bank will act as asset managers executing purchases on behalf of the Eurosystem. Each will take responsibility for its own local jurisdiction, with Banque de France also covering Finland, Ireland, Luxembourg and Portugal. Other markets will only be explicitly allocated in case of eligible issuance.

Structured Finance

SME commitment confirmed

KfW plans to commit €1.3bn to SME securitisation in 2017, including up to €500m for transactions in European countries outside of Germany. The bank has so far this year invested €800m in European SME securitisation, around half of which was in German transactions. Another deal is currently being prepared, which will push total volume to the target level of €1bn in 2016.

KfW says its expectations with regard to the European securitisation initiative ENSI - which it established with national promotional banks and the European Investment Fund (SCI 14 July) - have been met. "2016 saw a successful start of our cooperation," comments Günther Bräunig, member of the KfW executive board in charge of capital markets. "We have already jointly invested in six different transactions and thus supported the European SME sector. And we want to further intensify the European cooperation in 2017."

The European Fund for Strategic Investments (EFSI) is also expected to provide funds in support of SME securitisation in the coming year.

Structured Finance

ABCP performance to remain strong

European ABCP conduit performance is expected to remain strong next year, reflecting the sound credit quality of the vehicles' sponsors and liquidity providers, Moody's says. Meanwhile, Fitch expects demand for US ABCP issuance to continue to be stable, despite regulatory changes related to money fund reforms and risk retention.

"In 2016, the last partially supported European conduit was converted to full support, meaning that European ABCP investors are no longer exposed to any asset or seller risk. In 2017, we believe all European conduits will continue to be fully supported," says Carine Kumps-Feniou, a vp and senior analyst at Moody's.

Moody's considers that both the number of conduits and the EMEA ABCP outstanding balance will be stable next year. Multi-seller and repo will remain the two main types of EMEA conduits.

Assets such as consumer loans and equipment leases have risen in 2016. But for the multi-seller portfolios, trade receivables, auto loans and leases will continue to be the main asset categories, subject to any new regulatory constraints.

In 2016, both EMEA and US conduits continued to adjust their programme documentation and structure, ensuring compliance with US regulations, which comes into effect before the end of the year. Kevin Corrigan, senior director in Fitch's structured finance team, notes: "US ABCP programme sponsors have taken measures to operate within the new regulatory environment. We do not expect the regulations to change outstanding ABCP."

Outstanding US ABCP remained stable in 2016, after declining slightly in 2015.

Structured Finance

Climate recommendations welcomed

Recommendations for improved quantitative and qualitative climate-related disclosures could increase the importance of climate-related risks and opportunities for corporations and investors alike, says S&P. Climate-related financial disclosures should help investors assess risk and improve allocation of capital.

The recommendations are the result of a year's work by the Task Force on Climate-Related Financial Disclosures (TCFD). The task force was created by the Financial Stability Board (FSB) to develop voluntary, consistent climate-related financial risk disclosures for use by companies in providing information to investors, insurers and other stakeholders.

"The recommendations look at both the risks and the opportunities associated with climate change and are likely to drive the consideration of these factors to the fore of corporate decision making," says Michael Wilkins, head of environmental and climate risk research, infrastructure ratings at S&P. S&P is a member of the TCFD.

The recommendations are subject to a 60-day response period and adoption is expected to be strong. The recommendations by the previous Enhanced Disclosure Task Force were widely implemented, with some countries such as the UK seeing implementation rates as high as 92%.

"Over time, we believe the recommendations will help investors to more comprehensively assess climate risks, allowing for improved allocation of capital," says Wilkins. He adds: "The scenario analysis recommendation should provide valuable insights into how business strategy deals with climate change, especially for those corporates operating or investing in carbon-intensive areas."

S&P believes that as green technologies continue to improve and their cost curves decline, they will continue to become less reliant on politics and more able to be rationalised on the economics alone. There has been a marked shift towards clean energy in the last couple of years, with business and finance expected to continue on this path in 2017.

Structured Finance

Euro issuance drops

€40.2bn of securitised product was issued in Europe in 3Q16, according to AFME's latest securitisation data report. This represents a decline of 46.5% from 2Q16 (€75bn) and a decline of 30.3% from 3Q15 (€57.6bn).

Of the €40.2bn issued, €16bn was placed (representing 39.8% of issuance), compared to €29.3bn placed in 2Q16 (representing 39.1%) and €18.6bn placed in 3Q15 (representing 32.3%). Net issuance was negative during the third quarter, with €1.24trn outstanding at end-3Q16, down from €1.27trn at end-2Q16.

Credit rating upgrades outpaced downgrades during the quarter, with upgrades concentrated in European CLOs and prime RMBS, similar to prior quarters.

Structured Finance

LatAm markets 'will rebound'

Donald Trump's election victory has implications far beyond the US, not least in Mexico, where potential US policy changes will weigh on economic growth. Mexican RMBS should remain steady, however, while Moody's believes Argentina and Brazil are set to return to growth in 2017, helping to support the credit quality of assets backing securitisations in those countries.

The Mexican RMBS market is expected to remain mostly insulated from the potential negative impact to the nation's growth that could result from changes in US trade, immigration and tax policies. Collateral features of outstanding deals, such as loans backed by fixed mortgage instalments and fixed interest rates, will help mitigate transaction risks stemming from higher interest rates.

Moody's expects that the pace of structured finance issuance in Mexico might decline over the coming months. However, overall issuance volume in 2017 is expected to be higher than in 2016, mainly due to a rebound in RMBS issuance.

There has been mortgage product diversification in Mexico, owing to a more seasoned market with broader product offerings for different income levels. Some portfolios in 2017 are expected to include products from different mortgage originators.

Meanwhile, Argentine securitisations will be supported by an economic recovery in the country, with the credit quality of consumer loan ABS likely to strengthen as a result of the improved job market. However, Moody's warns that the expansion of credit to borrowers lower down the credit spectrum amid competition in the financial sector will weaken underwriting standards.

The rating agency believes new regulations will stimulate a rebound in securitisation issuance and lay the groundwork for the emergence of new securitisation asset classes. As the market becomes more sophisticated, more complex structures - such as variable funding notes, covered bonds and multi-seller structures - are expected to emerge.

In Brazil, the macroeconomic environment is showing signs of stabilisation, although lagging effects from the recent recession will result in weaker collateral performance in auto ABS and trade receivables transactions. Moody's adds: "Despite the weakening credit trends, the credit performance of securitised pools that we rate will remain within expectations, owing to originators' tight underwriting criteria and the selection of high-quality assets for inclusion in the pools."

Structured Finance

'Mixed effects' from rate hikes

The US Federal Reserve has raised interest rates from 0.25% to a range of 0.50%-0.75%, which will have varied implications for structured finance, according to Moody's. The rating agency adds that it expects the Fed to raise rates three more times in 2017 to 1.25%-1.50% year-end.

Moody's comments that US consumers are generally "well-positioned to cope with rising debt expenses given the current stable macroeconomic environment and generally strong household balance sheets" resulting in neutral or slightly negative credit effects on consumer asset classes including auto ABS, credit card ABS and RMBS. In terms of consumer ABS, the rating agency adds that the impact of the rate rises will depend on how much exposure transactions have to obligors with variable-rate debt.

In a rising rate environment, obligors with variable-rate debt have less disposable income to pay down their debt obligations and so if not offset by a strengthening economy, the credit quality of securitisations backed by variable-rate receivables will decline. Moody's adds however that this should be moderated by low unemployment and by household debt service coverage being relatively low.

Furthermore the rating agency adds that, in terms of RMBS, rising long-term interest rates will lead to a slight weakening in the credit quality of new RMBS transactions because underwriting standards will loosen and prepayments will slow down. For existing RMBS, the firm suggests there will be no material effect on performance. Moody's suggests that for new and existing SFR transactions, rising short-term rates will reduce DSCRs but not materially affect the credit performance of the transactions because the values of the underlying homes will continue to grow, albeit more slowly.

For auto ABS, Moody's comments that gradually rising short-term interest rates are marginally credit negative for new and existing auto loan and lease ABS, because for deals with floating-rate senior notes, which comprise the majority of the sector, rising rates will cause excess spread to decline. However, because of the limited size of the floating-rate notes, the impact on the sector will be small, especially if interest rises gradually.

The agency comments that the effect of modest short-term interest rate increases on credit card ABS will be neutral because of the resulting average increase in borrowers' monthly minimum payment obligations and the subsequent increase in charge-offs will be marginal, and also because the reduction in excess spread will be minimal. Interest rates will affect new and existing deals similarly because credit card ABS are issued out of master trusts, which have revolving pools of assets that support all notes issued out of a trust, both new and existing, Moody's states.

Student loan ABS will see mixed effects from rate rises with negative implications for new student loan ABS due to likely increases in delinquencies and net losses, acceleration of refinancing activity for borrowers with variable rate loans and a decline in excess spread. However, the firm comments, rising short term interest rates will be credit positive for new private student loan ABS backed by variable-rate loans and that issue fixed-rate notes, owing to an increase in excess spread.

In the commercial space, Moody's suggests that new and existing CMBS will be negatively affected by the rate rises owing to the effects of higher debt service costs. This will be caused by a number of factors such as coupons on loans backing new conduit deals will increase, thereby reducing the DSCR in relation to a given property's cash flow.

For CLOs however, the rating agency thinks that rate rises will be a credit positive because the excess of floating-rate assets over total debt (excluding the subordinated notes) will foster an increase in excess spread. The firm comments that, among other factors, with three-month Libor now close to the 1.0% mark at which most Libor floors on leveraged loans have been set, both asset and liability rates will rise together with future increases in short-term rates.

The agency adds that for commercial and esoteric ABS there will likely be a mixed impact due to rate rises with higher rates having little effect on equipment finance contracts because they are usually fixed rate with original terms ranging from 36 to 60 months, while the bonds in the transactions are mostly fixed rate.

Moody's adds that they might however have a positive effect on aircraft ABS issued since 2013, because lease rates generally rise in tandem with interest rates and the bonds in the deals have fixed rates, but concludes that rate rises could be "credit negative for small business ABS that include a significant portion of obligors with adjustable-rate mortgages, although continued growth in the economy will strengthen the financial position of small businesses and make them better able to service their debt."

CDS

Derivatives secretary appointed

ICE Benchmark Administration (IBA) is set to assume the secretarial role on ISDA's credit derivatives determinations committees (DCs). IBA was chosen following a seven-month selection process that began with a public invitation to tender in May.

As DC secretary, IBA will be responsible for administrative duties, such as passing questions submitted by eligible market participants to the relevant DCs, coordinating the timing of DC meetings, organising and compiling the votes of DC members, and publishing DC decisions. The DC secretary does not vote on whether credit events have occurred.

The selection of IBA as DC secretary is part of an ongoing initiative to strengthen the DC process and ensure it continues to align with evolving governance standards. As well as its administrative responsibilities, IBA will develop a new DC website, introduce and maintain infrastructure required to administer the DC process, and work with the DCs and the wider industry to ensure the process is robust, transparent and meets evolving regulatory standards.

The transition is expected to take approximately six months. ISDA will continue to maintain and publish the standardised documentation used as a basis for credit derivatives transactions, such as the 2003 and 2014 ISDA Credit Derivatives Definitions.
 

CLOs

Innovative CLO structured

AllianceBernstein subsidiary AB Private Credit Investors has priced its inaugural middle-market CLO. Dubbed ABPCI Direct Lending Fund CLO I, the US$351.3m transaction has a unique feature, whereby a pro-rata percentage of both the collateral and notes can be partitioned off into separate entities (ABPCI Direct Lending Fund CLO I First Static Subsidiary and ABPCI Direct Lending Fund CLO I Second Static Subsidiary) on two static dates - December 2018 and December 2019.

The feature means that the deal has the potential to become entirely or partially static before the end of the reinvestment period (December 2020), at the direction of the subordinated noteholders, after the first and/or second static date. This will lead to the distribution of principal proceeds from the first and/or second static percentage of remaining collateral to the subordinated notes, after payment of the first static class A and B notes but before the reinvesting and/or second static class A and B notes are paid in full. Additionally, because any excess cash will be distributed to the subordinated notes from these static portfolios, any remaining class A or B reinvesting notes will not see the traditional benefit of overcollateralisation increases.

The transaction will be collateralised by at least 85% senior secured loans, with a minimum of 95% of the loan issuers required to be based in the US. A maximum of 10% of the loans in the pool can be covenant-lite.

Rated by DBRS and S&P, the CLO comprises US$240.6m A (low)/A- rated class A notes (which priced at three-month Libor plus 270bp), US$22.8m NR/BBB class Bs (plus 592bp) and US$87.9m unrated subordinated notes. Natixis is placement agent on the deal.

CMBS

Retail dominates delinquencies

US CMBS delinquencies rose by 4bp in November to 3.29% from 3.25% a month earlier, largely due to a shrinking index denominator, according to Fitch's latest index results for the sector. Resolutions of US$527m exceeded new delinquencies of US$410m, while US$8.8bn of portfolio run-off exceeded Fitch-rated new issuance volume of US$2.6bn.

Both the largest new delinquency and the largest resolution last month were retail properties. The largest new delinquency was the US$60m Gateway Shopping Center loan (securitised in MSCI 2006-HQ9), which became 60-plus days delinquent.

The largest resolution was the US$76.7m Hanover Mall asset (JPMCC 2005-LDP5), which was sold and liquidated with a 71% loss severity on the original loan balance of US$87.5m (see SCI's CMBS loan events database). Over 46% of total resolutions last month were REO dispositions.

Current and previous delinquency rates for November by property type are: 5.17% for retail (from 5.12% in October); 4.73% for office (from 4.61%); 4.29% for industrial (from 4.20%); 3.96% for mixed use (from 3.99%); 3.90% for hotel (from 3.86%); 0.79% for multifamily (from 0.79%); and 0.61% for other (from 0.77%).

CMBS

RFC issued on rent-roll standard

The commercial arm of the Mortgage Industry Standards Maintenance Organization (MISMO) has released for industry comment a proposed standard for the maintenance and sharing of commercial and multifamily real estate rent-roll information (SCI 20 October). The standard includes 87 fields of property and financial data, as well as an easy way to maintain and share the data through widely used secure technology.

"There has never been an accepted industry standard for the collection and reporting of commercial and multifamily rent-roll data, making it more challenging to value and transact assets," comments Jim Flaherty, founder of mortgage originations platform Backshop and ceo of CMBS.com. "Everyone benefits from transparency in commercial and multifamily lending, which will be enhanced by this standard."

He continues: "But while the standard is a big step forward for the industry, voluntary compliance is insufficient to assure sufficient transparency to properly value and manage assets. The standard should be mandatory, and not just for public CMBS deals, but for private market loans."

Specific data fields at the property level include: tenant name, tenant contract rent amount, unit number, tenant type, lease begin date, lease end date, lease status type, unit square feet and currency code. Final adoption of the standard is expected in February 2017 at the MBA commercial real estate finance conference in San Diego.

CMBS

Maturity wall shrinking

Almost US$190bn of US CRE loans in CMBS loans have been paid off or liquidated from the start of 2015 through the first three quarters of 2016, according to Trepp. The firm adds that this represents a large portion of the wall of maturities, which is comprised of CMBS loans with final payment dates between 2015 and 2018. At the start of 2015, the wall of maturities exceeded US$300bn.

Manus Clancy, senior md at Trepp, comments: "Strong market fundamentals, coupled with recent increases in property income levels have allowed borrowers to seize available capital and refinance loans prior to maturity. However, challenges may arise in 2017, as many loans that mature next year are over-leveraged. With rising Treasury rates and a Fed-imposed rate hike possibly impending, borrowers might find it harder to land refinancing."

Trepp states that of the almost US$190bn in matured CMBS that was liquidated from January 2015 through September 2016, roughly 55% of that balance was paid off prior to maturity. An additional 29.3% of that total was resolved at or within two months of maturity, while 3.83% of the debt was paid off after the loan was due, according to the firm's figures.

Trepp's data reflects that US$24.1bn in CMBS is due to mature by the end of 2016, US$112bn will mature in 2017 and a further US$17.6bn of loans will come due in 2018. Loans backed by retail and office properties make up the largest remaining portion of the wall of maturities, as those two sectors combine for US$86.8bn of the total debt maturing from now to the end of 2018. Trepp concludes that the retail and office sectors feature the highest percentage of delinquent loans maturing in that frame among major property types.

NPLs

Mammoth NPL ABS planned

UniCredit has unveiled plans to divest €17.7bn of NPLs, as part of an effort to deleverage its non-core portfolio. Dubbed Project Fino, the strategy involves transferring two portfolios of NPLs to SPVs in which the bank will retain a minority position.

Fortress and PIMCO will each manage an entity and take a majority position, which is initially expected to be 20%. This share will grow over time, such that UniCredit will eventually be able to derecognise the NPL portfolio from its balance sheet.

The transfer price has not been disclosed yet, but UniCredit will take a €8.1bn loan loss provision as a result of the transaction. The divestment lays the foundation for a €13bn equity raise in January.

The new NPL securitisation structure is understood to have neither a GACS guarantee, nor involvement by the Atlante fund. Completion of the transactions is subject to customary conditions and is targeted to close by the end of 1H17.

Jean Pierre Mustier, UniCredit ceo, comments: "We are taking decisive action to deal with our legacy issues to significantly improve the quality of our balance sheet and lay the foundation for future recurring profitability."

Morgan Stanley and UniCredit CIB acted as financial and structuring advisors on the transactions.

RMBS

FHFA scorecard goals published

The FHFA has released its 2017 scorecard for Fannie Mae, Freddie Mac and Common Securitization Solutions (CSS). The scorecard furthers the FHFA's aims of maintain credit availability, reducing taxpayer risk and building a new single-family securitisation infrastructure for the GSEs.

For the Common Securitization Platform (CSP) and Single Security, which remain high priorities, the FHFA expects the GSEs and CSS to continue working with each other towards implementation in 2018. The GSEs are instructed in the scorecard to continue building and testing the CSP, to implement changes necessary to integrate the GSEs' related systems and operations with the CSP, and to implement the Single Security on the CSP.

The GSEs are also instructed to incorporate into the development of the CSP a focus on the functions necessary for current single-family securitisation activities, to include the development of operational and system capabilities necessary for CSP to facilitate the issuance and administration of a Single Security for the enterprises, and to allow for the integration of additional market participants in the future.

As a new entity, the CSS is also expected to continue to integrate diversity and the inclusion of minorities, women and the disabled in all business activities.

RMBS

Non-QM market 'maturing'

Caliber Home Loans has closed the US$225.75m COLT 2016-3 Mortgage Loan Trust, the first post-crisis non-QM RMBS to feature a triple-A rated tranche. The transaction is backed by 474 fixed- and adjustable-rate prime and non-prime first-lien residential mortgages.

Fitch notes that it has become more comfortable with the operational risk of the issuer through extensive due diligence results, multiple on-site visits and early performance trends. The triple-A rating also reflects the significant initial credit enhancement and modified sequential payment priority.

Rated by DBRS and Fitch, the transaction comprises US$129.92m AAA/AAA class A1 notes, US$26.75m AA/AA class A2s, US$37.14m A/A class A3s, US$9.82m BBB/BBB class M1s, US$7.22m BB/BB class B1s and US$7.11m B/B class B2s. There are also US$7.79m unrated class B3 notes.

Caliber is the originator and servicer for 71.2% of the portfolio, while Sterling Bank and Trust accounts for 22.3% and LendSure Mortgage Corp accounts for 6.5%. The Caliber mortgages were originated under five programmes: jumbo alternative (accounting for 31.2%); homeowner's access (29.8%); fresh start (8.8%); investor (1.3%); and foreign national (0.2%). The Sterling mortgages were originated under its advantage home ownership programme, while LendSure originated its portion of the pool through its wholesale lending network, all of which is serviced by Caliber.

Although the mortgage loans were originated to satisfy the CFPB ability-to-repay rules, they were made to borrowers that generally do not qualify for agency or non-agency prime jumbo products. In accordance with the CFPB QM rules, 0.7% of the loans are designated as QM Safe Harbor, 31.1% as QM Rebuttable Presumption and 61.7% as non-QM. Approximately 6.5% of the loans are not subject to the QM rules.

Wells Fargo RMBS analysts note that compared to the previous COLT transaction, the deal features tighter performance triggers. Additionally, the collateral has generally higher credit scores, lower LTVs, higher liquid reserves and higher retail channel origination.

"We see this transaction as a welcome sign that the non-QM market is slowly maturing. As rating agencies and investors become more comfortable with non-QM transactions, we expect growing issuance in this sector in the future," the analysts observe.

The deal was arranged by Credit Suisse.

RMBS

Freddie debuts re-performing deal

Freddie Mac is marketing its first credit risk transfer RMBS backed by seasoned re-performing loans - the US$943.52m Freddie Mac Seasoned Credit Risk Transfer Trust 2016-1. The collateral - comprising 4,097 loans - was either purchased by Freddie Mac from securitised Freddie Mac Participation Certificates or retained by the GSE in whole loan form.

The portfolio contains 100% modified loans. Historically, each loan experienced at least one credit event and was modified under either GSE HAMP or non-HAMP modification programmes.

Within the pool, 3,878 mortgages have forborne principal amounts as a result of modification. For all but three loans (or 0.1% of the pool), the modifications happened more than two years ago. The loans are approximately 118 months seasoned and all are current, as of the cut-off date.

The loans will be divided into two groups: the Group M loans were subject to fixed-rate modifications, while Group H loans were subject to step-rate modifications. Principal and interest on the Group M and Group H senior certificates will be guaranteed by Freddie Mac.

The guaranteed certificates will be backed by collateral from each group respectively. The remaining certificates will be cross-collateralised between the two groups.

DBRS has assigned provisional ratings of BBB (low) and B (low) to the US$33m class M1 and US$94.4m class M2 notes respectively. The capital structure also comprises US$306.26m class MT, US$415.54m class HT and US$94.35m class B notes.

Credit Suisse and Wells Fargo are arrangers on the deal.

RMBS

Swapless Dutch RMBS concerns raised

Dutch RMBS featuring a partial interest rate hedge will face increased risk of interest rate shortfalls in the coming years if prepayments fall, says Moody's. The low interest rate environment over the last few years has led to a steady decrease in average mortgage portfolio interest yields, while rising interest rates in the future will put downward pressure on prepayment rates as fewer borrowers are incentivised to prepay in order to refinance.

"As interest rates rise and prepayments decline, portfolio interest collections may not be sufficient to cover the senior fees and coupon in swapless transactions, even if there is a partial interest risk hedge in form of a cap interest rate agreement. Declines in prepayments slow collateral amortisation, thus delaying redemptions on senior notes and keeping the senior note coupon expenses relatively high," says Moody's associate analyst Michal Kuehnel.

Moody's says that a large outstanding senior tranche exacerbates the risk of interest shortfall after the maturity of the cap agreement. Interest shortfalls can lead to non-payment of a certain coupon portion and ultimately to an event of default for the transaction.

The rating agency adds that RMBS transactions typically have multiple features to mitigate the risk of interest rate shortfalls. Reserve funds and liquidity facilities cover interest shortfalls up to a certain point. The use of principal to pay interest is an additional mechanism to provide further source of liquidity.

RMBS

Liquidation timelines 'declining'

Liquidation timelines on defaulted US mortgage loans appear to have peaked, Fitch comments. While the rating agency expects loss severities to decrease and timelines to shorten, it doesn't expect a rise in ratings on RMBS, as these changes are already reflected in the firm's analysis.

Timelines topped out at four years earlier in 2016 and have begun to decline, with the inventory of severely delinquent loans now at its lowest level since 2007. Median timelines - which have historically been just below the average - have trended further below it since 2015, while the widening average-median gap represents a long tail of long-timeline loans that continue to elevate the average. Concurrently, the bulk of the timeline distribution has begun to shift lower, according to the agency.

Fitch comments that historically nearly all liquidations occurred within 36 months of the borrower becoming delinquent. However, this rate plateaued in late 2014 and recently started to increase modestly and plateaued at a higher level than all liquidated loans.

The trend also varies among states, with timelines in states that require judicial foreclosures - such as New York, New Jersey and Florida - remaining well above the national level, while non-judicial states like California have outperformed the national average. Fitch concludes that the timelines also vary among judicial states. For instance, Florida has worked through its large distressed loan inventory, whereas timelines in New York/New Jersey increased over the last two years and have only just begun to decline.

RMBS

GSEs introduce new mod programme

Fannie Mae and Freddie Mac will each offer a new flex modification programme to replace their versions of HAMP, which is set to expire at the end of this year. The GSEs developed the flex modification programme in alignment with each other and at the direction of the FHFA.

The flex modification programme is expected to provide a 20% payment reduction for eligible borrowers. A high percentage of those who are at least 60 days delinquent would be eligible, while the modification could also be an option in certain circumstances for borrowers who are current or less than 60 days delinquent.

Servicers must implement the new programme by 1 October 2017. HAMP expires on 30 December, and in the meantime servicers must continue to evaluate borrowers for the GSEs' standard and streamlined modifications.