Contents

ABS

Upwardly mobile

Debut mobile ABS could be first of many

The first UK mobile handset securitisation closed in November, signalling the beginning of a burgeoning mobile ABS sector in Europe. The £125m private deal was backed by consumer loans for the purchase of Virgin mobile handsets and arranged by Royal Bank of Canada, which worked with Virgin Mobile's owner, Liberty Global, to open up a much-desired asset class to a wider range of investors.

Tom Huntingford, structured finance lead at Liberty Global, says that the transaction was enabled by the fact that Virgin was the first mobile carrier in the UK to launch a split contract, separating the receivables from the handset and the mobile contract, meaning Liberty Global was able to warehouse the handset loans. "Over the past two years we've therefore been building a loan book of the handset loans - essentially a warehouse of 24-month consumer loans. Once we had a large enough loan book, we were able to execute the handset finance securitisation," he explains.

He adds that being the first of its kind in the UK, the deal had an innovative approach and potentially lays the groundwork for more deals to come. "The deal was the first ABS financing backed by handset loans in the European market. Structurally, we have the ability to issue multiple series supported by a single revolving pool of loans, including new private and even public notes. The fully segregated nature of the receivables themselves was also different - a split contract for the handset loan, as opposed to a commingled airtime and handset receivable."

In terms of whether the UK is likely to see many more deals from other players or whether the market can potentially scale up such as in the US, Huntingford notes that there are some limitations but it certainly has a lot of potential to be much more vibrant. He continues: "A few factors limit the UK's growth, with a major one being population, with the US being obviously much larger by that measure. Equally, in the US it's more common to have people on split contracts, whereas it's only been like that here for a fairly short time. The split contract has been well received in the market, but it is unknown if it will replace completely the bundled model."

The deal was unrated, which Huntingford believes was a suitable choice at this stage and opens Virgin's debt up to a wider range of investors. He comments: "Virgin's debt is rated double-B minus. By issuing an ABS note, we could achieve the equivalent of a double-A rating on the securitised notes. The deal was issued to a Royal Bank of Canada entity and so the entity gets a rating affirmation from the agency - the notes themselves weren't formally rated."

Liberty didn't market the ABS through an investment roadshow to garner interest in the deal, but it was also of a modest size compared to many public deals. "Some US operators have done public deals at larger sizes - the largest operators have something over US$10bn in receivables in the US. Part of the reason we did a private deal with an ABS entity is that to [make] a public deal worthwhile, you probably need to issue notes nearer £300m. As such, we didn't go after specific investors - if investors want to have exposure to the notes, they must do so through the larger RBC entity," Huntingford says.

Allen & Overy partner Tim Conduit, who worked as part of a team advising Liberty on the deal, adds that while it wasn't marketed widely, investors welcomed a "new product which gives them access to a mature market with a diversification of users".

Huntingford says that his firm is pleased with the result. "At the current cost, we're saving some 150bp-200bp than other forms of funding in high yield bond products, for example. We would expect these to scale up through continued or larger issuance."

Conduit suggests that the transaction could act as proof of concept for mobile securitisation and potentially serve as a catalyst for further transactions in the UK. He concludes: "We think this deal certainly opens the door to other carriers; it proves the concept and demonstrates that securitisation is an effective way to raise finance and a useful tool to have in the funding mix. It's a good asset class; the default rates are generally very low, as a mobile phone payment tends to be both manageable and a priority for consumers. What would encourage further growth in this market would be further deals in the public markets."

RB

NPLs

State rescue?

Nationalisation could delay BMPS securitisation

The Italian parliament has approved €20bn to prop up the country's most fragile banks while it readies a possible state rescue of Banca Monte dei Paschi di Siena (BMPS), its third largest lender. The parliamentary approval follows scepticism expressed by Atlante II over the terms of a bridge loan that is key to BMPS' planned €9.2bn NPL securitisation.

The senior tranche of the BMPS securitisation is expected to be guaranteed by GACS, while the junior tranche will be assigned to the bank's shareholders. Atlante II is supposed to be purchasing up to €1.6bn of the mezzanine notes.

GACS has the effect of improving the portfolio, as "the IRR applied to the discount of the expected cashflows will be lower than the usual 15% applied by investors, since it will be a blend of the guarantee cost plus a guaranteed coupon for the senior notes (3.6% for the senior notes, 8% for the mezzanine and 15% for the junior ones) and the lower the IRR, the higher the price of the portfolio," says Francesco Franzese, md at Aram Capital.

He adds that the transfer price of the NPLs for the BMPS securitisation was approximately the same as for the Banca Popolari di Bari (BPB) deal, at the low- to mid-30s, with any differences driven mainly by portfolio composition, quality of real estate assets and court timing. The junior and mezzanine tranches of the BPB securitisation were eventually sold to Davidson Kempner Capital Management after the Atlante fund retreated from an earlier bid.

Nevertheless, Franzese suggests that since nationalisation is the most likely outcome for BMPS, this could push the sale of its securitisation to mid-2017 and this may be an optimistic assessment. It remains unclear how this will impact the timing of Banca Carige's planned €900m NPL securitisation, which is also expected to take advantage of GACS.

However, according to Zachary Lewy, founder and cio at Arrow Global, there is "little reason why NPL investors should be worried about the likely supply of portfolios to sell in the market". He elaborates that bank balance sheets have been under scrutiny by AQR and higher capital requirements at a time when interest rates are at zero. This in turn reduces return on equity, which in Europe is about half of American banks, leaving European banks "with no other choice but to shrink their balance sheets."

Lewy considers this "enormous wave of restructuring" as the main driver behind investor appetite in the Italian NPL market.

SP

RMBS

Non-conforming comfort

Aussie non-conforming RMBS thrives as wider sector stalls

Until this year, the Australian securitisation market had been recovering gradually from the depths of the global financial crisis, albeit not yet coming close to pre-crisis levels of activity. Issuance has stalled this year, although non-conforming RMBS volume has surged.

RMBS continues to account for the largest slice of the Australian securitisation market, with CMBS and ABS issuance both remaining quite limited. Non-conforming RMBS has averaged around 5% of total RMBS volume in the years since the crisis, but this year it has rocketed to account for around a quarter of issuance.

"Prime RMBS issuance this year has been very low, because the major banks have been able to get money at cheap rates elsewhere, so they have not needed to securitise. That means the people who have issued have primarily been the non-conforming and non-bank originators," says Jonathan Rochford, portfolio manager at Narrow Road Capital.

This shift towards non-conforming issuance should in no way represent a cause for concern, however, Rochford argues. While Australian non-conforming loans by definition have unusual features, they compensate for any perceived shortcomings with lower LTVs.

"The non-conforming mortgages are actually very good quality, and better quality than we are seeing from the major banks at the minute. I would say the non-conforming originators have been keeping a tighter rein, so their RMBS continue to be backed by high quality collateral," says Rochford.

With conforming RMBS harder to come by, and ABS and CMBS issuance still relatively limited, investors in the Australian securitisation market are increasingly required to take a position on their appetite for non-conforming paper. The coupons on offer should be more than sufficient to whet that appetite.

"There is a significant pay jump for investing in non-conforming RMBS. For example, the most recent non-conforming deal priced its most senior triple-A notes at 165bp, which is very attractive when compared to senior five-year paper at around 105bp or prime triple-A notes at around 130bp-135bp," says Rochford.

He continues: "As an investor, you both get paid more and also get more subordination. For non-bank RMBS, you are getting around 10% subordination, but for non-conforming you can get 30%."

With lower LTVs providing greater borrower skin-in-the-game and with considerably thicker tranches, there are clear reasons for investors to get comfortable with non-conforming RMBS. However, investors from outside of Australia also face the complexities of currency swaps.

As much as 60% of Australian ABS issuance was offshore before the crisis, but RBA figures put it at an average of only 4% since 2012. With around A$100bn of covered bonds outstanding - the majority of these issued offshore - it is possible that foreign demand is being catered for by covered bonds rather than ABS and RMBS. However, Rochford believes that overseas interest remains.

He says: "There is interest in Australian RMBS from overseas investors and there have been some foreign currency tranches issued - mainly in US dollars. It is attractive because as an overseas investor looking at Australian RMBS, you can get triple-A paper that pays a substantial margin, but it is vital to get the right currency swaps in place."

Looking ahead to 2017, the direction of regulatory developments will be key in shaping the market. If Basel 4 increases TLAC requirements substantially, forcing banks to hold a lot more equity, Rochford believes the increased cost of funding for banks will help to make non-bank issuers even more competitive.

"I was at an annual conference recently and the mood was pretty downbeat. There is a feeling in the market that APRA has been too tough on the market and, although they would not say so, that APRA takes issue with securitisation," says Rochford.

He continues: "APRA has made it impossible for major banks to use internal risk models to assess risk in warehouses because it does not want banks using warehouses for other originators' mortgages. Another frustration is that the risk weighting given to a triple-A RMBS tranche is pretty close to holding a whole mortgage, which completely ignores the benefits of pooling and tranching."

Another possibility for 2017 is a resumption of the AOFM RMBS auctions, which were put on hold in November last year (SCI 5 November 2015). There have not been any subsequent auctions in 2016.

"There is a big book available and if you were to offer the AOFM good pricing, they would almost certainly take you up on it. I have spoken to big overseas groups about investing in these RMBS, but the question is all about getting the pricing right," says Rochford.

He concludes: "What the AOFM does not want to do is impact the market negatively and sell at a price that will push spreads wider. But it is very high quality, well-seasoned paper, so if you are struggling to put investment grade money to work, then it is a fantastic opportunity - just so long as you can handle the currency basis."

JL

Structured Finance

Property prospects

Hiring remains flat, but CMBS up-tick possible

CMBS could provide a hiring boost in the US in 2017, while structured finance recruitment is likely to remain mostly flat globally. In the UK, senior hires are few and far between, but banks are still recruiting junior executives to develop smaller structuring teams.

Chadrin Dean, president and managing partner for Sandford Rose Associates,
Integrated Management, says that over the last year hiring has been flat for most areas of the securitisation market, with only a small amount of hiring for CLOs in secondary trading. With recruitment needs being so low, he suggests that most banks have switched to in-house recruitment, as it is more cost-effective.

CMBS, however, could be a source of optimism: "I can see it picking up a bit in CMBS next year. There are rumours of CMBS teams looking to boost headcount next year, particularly in the more risky segments of CMBS. There is some anticipation of a pick-up in activity there and I think it has the highest prospects for hiring in the first half of 2017," elaborates Dean.

In the UK market, hiring in the traditional sectors has continued a low trend, although other areas have provided some activity. One headhunter comments: "It's been another typical year really - not much homogeneity in the type of roles or sectors being hired for. There has been some hiring coming from the rating agencies, but otherwise no particular areas are undertaking concerted hiring."

The recruiter adds that there has been some movement in some parts of the direct lending space, although it's still waiting to ramp up. He comments: "The direct lending space has been interesting and there has certainly been some activity in the Netherlands, for example, which I'm a bit more optimistic about. However, while capital raising hasn't been a huge problem, it's a question of when they will deploy their capital and where? There is a lot of capital chasing too few assets."

Lisa Wilson, managing partner of Invictus Executive Search, agrees that banks continue to downsize since the crisis. But other areas have been more active, such as "funds, credit funds and some activity in consumer lending and specialist lending, which has seen some growth."

Additionally, she expects more activity from similar areas in 2017. "Credit card companies we expect to do more hiring, as they will look to securitise their portfolios to fund themselves and will need the expertise to do that."

According to Wilson, there are too many senior staff with too few interesting opportunities on offer, which is having a detrimental effect on the sector. But she adds that banks are still hiring at junior or associate level.

She says: "On the sell-side, firms only want junior or associate level guys - they don't want senior level structurers. They can get really well-trained, very good people that have come through quality training programmes. They don't really want senior guys that can originate but haven't actually executed a deal in ten years."

The alternative lending and marketplace lending space also saw some hiring of securitisation experts earlier in the year, although this has plateaued for a number of reasons. One recruiter comments on marketplace lending: "While some still think it could lead to hiring in the structured finance areas, the issue with it is that while the deals they've done have been fine for what they are, they need to be larger and more common in terms of the market and getting to a worthwhile size. Some still have questions about the sector and I would expect regulation to come into play sooner rather than later."

Some have suggested too that modern fintech firms could lure talent away from traditional financial firms like banks. Dean states that in the US at least, this is something banks are concerned about and are actively trying to combat.

"Banks are very worried about young people going to work for tech firms that will offer a better lifestyle and more flexibility over a stuffy old bank. Some of the private equity firms especially are poaching a lot of young talent or alternatively they're going to places like Amazon or Google, where they can wear what they want, get bikes on campus and play ping pong at lunch," he says.

Wilson believes that banks in the UK at least are unafraid of younger people preferring to work for fintech firms and would advise them against doing so. She says: "Banks aren't worried. They'll always find people to work for them."

She adds: "Also, personally I would strongly advise against a young person joining a new fintech firm early on in their career, unless it's got great funding and is run by serious professionals. They would get much better training at, say, Goldman Sachs than any new start-up. Once you have that training, your options are much better."

For more senior staff waiting for retirement, however, jumping ship to a new firm could be a good move. Wilson continues: "For older people with years under their belt...then it might make sense for them to jump ship to a new firm and join something where they can help build a business and tap into the upside."

In the meantime, one headhunter adds that 2017 is very likely to be much the same in Europe in terms of hiring levels. However, Wilson suggests that it's certainly not all doom and gloom.

"I'm not of the view that structured finance will wither and die completely in Europe once senior staff have left the market. There will always be a need for securitisation and there are lots of brilliant, well-trained young people coming through," she says.

She concludes: "However, people need to accept that the sector has shrunk post-crisis and it's going to stay this way. Banks will still need structured finance teams, but on a much smaller scale. Credit Suisse hired a new structuring team a couple of years ago, but found that it just needed half of them to run the team just as profitably, as there's just less high-margin deals happening."

RB

Structured Finance

SCI Start the Week - 19 December

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

Pipeline
While the pace of pipeline additions has slowed over the last couple of weeks, new deals do continue to be announced. Last week's ABS additions were US$250.8m Merlin Aviation and US$178m Westchester Tobacco Asset Securitization Corp Series 2016A, 2016B, 2016C.

US$500m Galilei Re series 2016-1 and US$500m Galilei Re series 2017-1 were the two ILS. There were also four RMBS: US$226.44m Bayview Opportunity Master Fund IVb Trust 2016-SPL2; US$127.4m Freddie Mac SCRT Series 2016-1; JPMMT 2016-5; and US$168.79m SoFi 2016-1.

Pricings
While the pace of pipeline additions has slowed, pricings have accelerated. There were six ABS prints last week, along with an ILS, six RMBS, four CMBS and 16 CLOs.

The ABS were: US$825m Citibank Credit Card Issuance Trust 2016-A3; A$333m FP Turbo Series 2016-1 Trust; €500m Indigo Lease 2016; US$215.43m Nelnet Private Education Loan Trust 2016-A; US$505.15m TCF Auto Receivables Owner Trust 2016-PT1; and £268m Towd Point 2016-Granite 3. The ILS was €255m Horse Capital I.

The RMBS were: US$225.75m COLT 2016-3 Mortgage Loan Trust; A$500m Liberty Series 2016-3 Trust; A$2bn Medallion Trust Series 2016-2; €1.26bn Phoenix Funding 6; US$114m RCO 2016-SFR1 Trust; and €600m STRONG 2016.

The CMBS were: US$913.4m CGCMT 2016-P6; US$271m DBWF 2016-85T; US$925m FREMF 2016-K60; and US$233.33m VNDO Trust 2016-350P.

The CLOs consisted of: US$351.3m ABPCI Direct Lending Fund CLO I; US$409.2m BlueMountain CLO 2015-1R; €362.57m Cairn CLO VII; €277.6m CGMSE CLO 2014-1R; €343.2m Eurogalaxy CLO 2013-3R; US$355.5m KVK CLO 2016-1; US$465.5m LCM CLO 2013-13R; US$418m Longfellow Place CLO 2013-1R; US$491.28m Madison Park Funding 2015-16R; US$368.15m Palmer Square 2014-1R; US$399.38m Pinnacle Park CLO 2014-1R; US$373.2m Regatta II Funding 2013-2R; €450.4m St Paul's CLO 2014-3R; €327.5m St Paul's CLO 2014-4R; US$510.45m Taconic Park 2016-1; and US$365.4m Venture CLO 2014-19R.

Editor's picks
Coupon clippers: 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...
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...
Odd-lot strategies: The US SEC recently fined PIMCO US$20m for misleading investors about the value of MBS odd lots in its BOND Total Return ETF. Valuing odd lots - particularly MBS - can be somewhat of a grey area and it is likely that PIMCO is not the only firm to have misused evaluated prices in this situation...
Learning by doing: 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...
Comfort zone: 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...
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..."

Deal news
• 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.
• AllianceBernstein subsidiary AB Private Credit Investors has priced its inaugural million 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.
• 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.
• 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.
• 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.
• 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.
• 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. 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.

Regulatory update
• 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.
• 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.

Structured Finance

Capturing the liquidity premium

Interest rate rises could increase volatility in the structured credit market, creating opportunities for relative value plays. Against this backdrop, junior CLO debt is seen as particularly attractive.

The spread premium associated with structured credit products remains compelling and is exacerbated by low interest rates, according to Ahrash Daneshvar, md at ZAIS Group. "In a low rate world, it's obvious that spreads are compressed, especially further down the capital structure and between risky and less risky assets. With tranched products, it is possible to achieve yield for a better quality risk in this scenario."

He highlights double- and triple-B CLO tranches as being particularly attractive in the current environment, especially when compared to high yield debt. "The reason behind the attractiveness of junior CLO debt is its relative complexity, due to a difficult regulatory environment and other hurdles. While there is a decent amount of issuance and participation, the sector is not as efficient as other parts of the credit markets."

The low rate environment has brought the possibility of increased volatility and there is concern that some investors are being forced into fixed income positions where it is unclear what will happen in a risk-off situation. Daneshvar suggests that as volatility can cause a shake-out in less liquid markets and increase dispersion, investors need long expertise in order to make opportunistic relative value plays.

"The market has seen periodic bouts of volatility and multiple points where spreads have gapped out. Rates are beginning to rise and in this environment, we'll find out what risk/reward in the context of floating-rate products really means. Long-run investors can capture the liquidity premium and select the best risk/reward opportunities when wobbles occur," he explains.

The ability to employ quantitative hedges is another advantage in the current environment. "Reducing carry with shorts on a systematic basis can result in lower-cost hedges. A variety of correlated instruments can be used to hedge securitised products, including CDX and iTraxx index tranches and options," Daneshvar notes.

Looking ahead, Daneshvar believes that 2017 should be a good year for securitisation and credit generally. Specifically for CLOs, he expects convergence between US and EU rules with dual-compliant deals to continue opening up the investor base in Europe, as well as introduce a broader range of assets.

"The broader market feels different going into 2017, especially as the regulatory environment could potentially become more stable, although Donald Trump remains somewhat of an unknown quantity," Daneshvar concludes. "While the political backdrop and regulatory environment continues to change, the rate of change appears to be slowing and the broader market represents a bigger picture than simply the US economy or EU regulation. More important for securitisation is how the market reacts to what feels like a different world going forward."

CS

Capital Relief Trades

Spanish SRT deal completed

Banco Santander has closed its first Spanish unsecured consumer loan significant risk transfer securitisation of 2016. The €1bn 15-year revolving FT Santander Consumo 2 deal comprises six classes of notes.

According to Steve Gandy, md at Santander Global Corporate Banking, the structure is a cash securitisation that "allowed us to reduce RWAs assigned to the loans by selling the bottom 5% of the capital structure to investors." The structure moreover was chosen for efficiency reasons, given that Santander has structured and registered with the CNMV many asset classes with a similar structure.

Investors in the ABS, on the other hand, achieved exposure to Spanish consumer loans at "good prices". Gandy confirms that they are European asset managers who were "interested in tradable securities, which would improve their liquidity in the secondary market".

The pool consists of 149,976 loans to 138,988 borrowers, with a weighted average portfolio interest rate of 9.56%. Madrid accounts for the largest geographic concentration of borrowers (at 20.05%), followed by Andalucia (17.65%) and Catalunia (11.5%).

The loans were used to finance mainly the purchase of vehicles (representing 17% of the portfolio), small consumer expenditures (28%) and finishing home working construction (14%). The weighted average seasoning of the pool is 1.74 years and the weighted average remaining term of the loans is 4.16 years.

Rated by DBRS and Moody's, the deal comprises €865m AA/Aa2 rated class A notes (which priced with a 0.60% coupon), €50m A/A3 class Bs (2%), €50m BBB/Baa3 class Cs (3.2%), €20m BB/Ba2 class Ds (6.5%), €15m B/Ba3 class Es (6.75%) and €15m CCC (high)/B3 class Fs (6.93%). Santander GBM and Credit Agricole were joint-leads on the transaction.

SP

CLOs

CLO BWIC volume tallied

JPMorgan figures as of 15 December suggest that US CLO BWIC volume is down by 25% in 2016 to US$26.99bn, while European volume decreased by 32% to €5.06bn. In contrast, CLO BWIC volumes rose by 50% in the US and 6% in Europe last year.

In the US, the first and second halves of 2016 saw almost identical CLO BWIC activity, with volume totalling US$13.4bn and US$13.6bn respectively. Line item count and notional volume peaked in August, with 659 BWICs for US$3.67bn, versus a monthly average of 488 and US$2.2bn.

In the post-crisis era, triple-As continue to be the leading tranche in BWIC activity on a notional basis, accounting for 45% on average of total annual volume since 2011. However, JPMorgan CLO analysts note that the triple-A tranche represented only 40% (US$10.71bn) of total US CLO BWIC volume in 2016, compared to last year's 53% (US$19.2bn).

Annual totals excluding the triple-A tranche decreased by 3%. US mezzanine tranches saw increasing CLO BWIC activity year-over-year, whereas investment grade tranches decreased by an average 20%. Notably, 2016 double-B tranche volume reached US$5bn, after surging by 150% in year-over-year activity from 2014 to 2015 and increasing by another 29% this year.

On a line item BWIC count basis, double-Bs saw the most activity this year (totalling 1547 (26%) BWICs), followed by triple-As (1452 (25%)) and triple-Bs (923 (16%)). Single-B BWIC activity also increased this year by 47% to US$1bn, although around 44% of the names did not trade, according to the JPMorgan figures.

Meanwhile, European CLO BWIC activity picked up post-Brexit, with volume in 2H16 increasing by €650m, averaging €475.6m per month versus €367.7m in 1H16. November and September were the busiest months, seeing €894m for 170 line item counts and €837m for 169 line item counts respectively.

Nevertheless, European BWIC tranche volumes and line item counts decreased for every tranche, except single-B - which increased by 136% to €270m in 2016, compared to €120m in 2015 and €40m in 2014. BWIC volumes declined the most in triple-A, double-A and equity, down by 59%, 35% and 19% respectively.

Triple-A tranches totalled €1.29bn, or 26%, of this year's volume. Averaging €107m per month, triple-A BWIC volume was as low as €8m in May and as high as €478m in November.

Double-B tranches saw the highest line item count at 299, averaging 25 a month, according to JPMorgan.

CS

Marketplace Lending

MPL ABS 'compares well' in 2016

Despite significant turbulence earlier in the year, marketplace lending ABS has maintained steady growth and better or similar performance than other areas of the consumer loan ABS sector, according to JPMorgan ABS analysts. They add that the marketplace lending ABS sector has also been one of the fastest growing in ABS, starting with US$3.3bn in 2013 from three programmes to US$9bn across 15 different shelves in 2016, with this year's total including US$3.4bn from eight marketplace lending ABS programmes.

The JPMorgan analysts comment that the growth and changing landscape of the MPL ABS sector is shown in securitisation pool characteristics. They find, for example, that weighted average coupons (WACs) on MPL ABS increased to 16.5% from 13.5% last year, reflecting the pull-back in the industry after turbulence earlier in the year.

Furthermore, recent performance data in 2015 and 2016 show MPL ABS has better or similar performance than branch consumer loans and non-prime auto loans on most metrics. The analysts find that for the 2015 vintage, 30-59 day delinquencies are at 1.72% for MPL ABS, compared to 1.70% for branch consumer loans and 8.68% for non-prime auto.

Branch consumer loans (to borrowers with the lowest credit scores), however, had the highest 2015 vintage 90-plus delinquencies at 2.49%, compared to 1.43% for both MPL and non-prime auto ABS. With the benefit of recoveries, non-prime auto ABS pools realise lower cumulative net losses than unsecured consumer loans.

The JPMorgan analysts also highlight the performance of the Avant deals, of which the unrated AVNT 2015-A transaction failed its cumulative loss trigger. Losses hit 17.1% versus the 16.6% threshold and the deal switched to sequential pay. The three 2016 rated Avant transactions are still performing within expectations, albeit with worse performance than in 2015.

Of AVNT 2016-B, cumulative losses are higher than the 2015 transaction, but the AVNT 2016-B trigger thresholds are set higher by around 1%-2% and AVNT 2016-C still higher at 2%-7% as the deals season. The analysts comment that later transactions have significantly higher credit enhancement than earlier ones, with AVNT 2016-C having initial over collateralisation (OC) of 18.3% and a target OC of 34.5%, compared to AVNT 2016-A having a 13% initial OC and 28% target OC. They add that this is positive for investors in that credit enhancement has increased to reflect heightened downside performance risks.

After the resignation of Lending Club's ceo in May, the firm's share price dropped significantly, but after a more positive earnings report in 3Q16, the stock price jumped 15% in November with investors anticipating improvement from the company in the future. The analysts add that MPL ABS secondary trading volume increased this year, with spikes after sharp drops in Lending Club's stock price, and comment that liquidity in MPL ABS has improved, as measured by increased trading flows despite the equity volatility.

The analysts conclude that MPL ABS new issue spreads have also tightened recently, since the recovery in Lending Club's stock price, after widening to 300bp for senior tranches in the middle of the year.

RB

Capital Relief Trades

Proving compliance

Demonstrating significant risk transfer discussed

How to demonstrate significant risk transfer (SRT) was a hot topic at SCI's Capital Relief Trades Seminar last month. Panellists discussed the importance of having robust governance and risk management processes in place, as well as what to avoid when preparing to execute a capital relief transaction.

Articles 243 and 244 - which correspond to traditional (cash) and synthetic securitisations respectively - are the relevant sections of the CRR to consider when demonstrating significant risk transfer, according to Ramnik Ahuja, director in the bank treasury team at Deloitte. "They cover mechanistic tests, such as how much of a tranche is required to have been transferred to third parties," he explained. "If the capital structure of the transaction includes mezzanine tranches, at least 50% of the risk-weighted exposure amount associated with mezzanine tranches needs to be transferred. If there are no mezz tranches, then at a least 80% of the first loss tranches must be transferred, where the first loss tranches refer collectively to those that are either 1250% risk-weighted or deducted from capital of the originator."

Jeroen Batema, ceo, Open Source Investor Services, stressed that proving significant risk transfer means defining what risk is actually being transferred and demonstrating that robust models have been employed across the entire life of a deal, including the impact of prepayments and downgrades and so on. "Please leverage on your stress test and IFRS lifetime allowance framework and include the guys within your institution preparing these statistics as early in the process as possible," he said.

Executing a capital relief transaction is a long and resource-heavy process. To prepare, Steve Gandy, md, global head of ARCO notes and structuring at Santander, recommended that the various issuer stakeholders (risk management, capital, treasury, accounting, operations) are linked up - each with their own expertise - so that they all understand how an SRT transaction works and how it impacts the securitised portfolio.

"It is important to have a good governance process that defines internal committees who have sign-off, how far up the chain it goes and how much involvement risk managers need," Gandy added. "Be careful to identify and avoid any aspect of the deal that could be construed as implicit support by the originator, especially in the area of clean-up call options. Equally, be careful not to include provisions that obligate the originator to reacquire losses on any impaired assets."

The concept of commensurate risk transfer is another aspect to be aware of, as this is increasingly being considered by regulators across Europe. Ahuja suggested that there are three key elements at the heart of demonstrating commensurate risk transfer: the institution's understanding of risk (in other words, an issuer's own existing risk management processes need to be demonstrated robustly); consistency of internal capital and risk assessments (what is the issuer's own view around economic capital and how it has measured the risk associated with the assets); and economic substance of the transaction (ensuring that features such as call options, protection coupon and portfolio yield are taken into account).

While the UK PRA focuses on commensurate risk transfer, other regulators focus on different nuances of the rules, leading panellists to call for a consistent approach to capital relief trades across Europe. In particular, Gandy pointed out that a methodology for estimating expected and unexpected losses for standardised portfolios is necessary, as there is no specification in the CRR.

"The industry needs guidelines for defining worst-case scenarios, for which originators must demonstrate an adequate level of protection. A consistent approach is necessary to reduce the arbitrage that currently remains between jurisdictions," he suggested.

Regulatory calls appear to be another controversial issue. The panellists agreed that further clarity is needed around whether an originator has the right to call a deal if it is no longer rated or no longer achieves accounting derecognition, or if a regulator changes its mind about whether capital relief is achieved.

The EBA is due to release a report in 2017 on different practices observed in transactions claiming significant risk transfer, with the aim of establishing guidelines that it is hoped will provide more consistency. The authority is expected to focus on six major issues, including whether time calls are permitted and when, and in which circumstances synthetic excess spread can be used to cover losses.

Batema noted that he favours principles-based over rules-based practices because each capital relief transaction is different. He added that the European Datawarehouse initiative should be embraced by the capital relief trade community, as its data templates facilitate harmonisation, and further he encouraged standardisation of documentation.

CS

Structured Finance

Structured credit pro poached

Intermediate Capital Group has appointed Brian Marshall as md of business and product development for its US capital markets business. In this role, he will interact extensively with ICG's global distribution team, with responsibility for capital formation, developing and managing investor relationships, and contributing to the development of new products.

Marshall has over 18 years of experience in credit and structured credit markets. He joins ICG from GoldenTree Asset Management, where he was md responsible for raising capital for credit and structured credit alternatives vehicles.

Prior to joining GoldenTree in 2013, Marshall spent 15 years at Barclays Capital and Lehman Brothers, where he most recently served as md and head of structured credit sales.

Structured Finance

ED appoints new ceo

The European DataWarehouse (ED) has appointed Christian Thun as ceo, effective from 1 January 2017. He joined ED a year ago as coo (SCI 4 January) and has been responsible for leading data management, customer account management and research.

Prior to joining ED, Thun spent 14 years at Moody's Analytics. He has also worked for Baetge & Partner and for Dresdner Bank in Frankfurt and London. Thun replaces Markus Schaber, who has served as ED ceo since the data repository was launched in 2013.

CMBS

IRT internalisation completed

RAIT Financial Trust has completed its transaction to internalise the management of Independence Realty Trust (IRT), following the sale of Independence Realty Advisors and certain assets of Jupiter Communities to IRT for US$43m (SCI passim). IRT has also repurchased all 7.3m shares of IRT common stock owned by certain RAIT subsidiaries for US$62.2m.

As a result of the internalisation of IRT's management, RAIT receives aggregate proceeds of US$105.2m and was able to deconsolidate IRT from its financial statements, as of 5 October 2016. The REIT is expecting to achieve significant annual expense savings, which are expected to come from multiple factors, including a decrease in RAIT's employee count from approximately 645 employees to approximately 240 employees. Employees who provided services for RAIT Residential are expected to be offered employment by IRT after the closing.

The finalisation of the internalisation of IRT is the last stage of RAIT's transition to focus on its lending business and to try and provide enhanced returns to its shareholders. RAIT has also completed the sale of US$265.3m of properties from its property portfolio and the repayment of US$233.3m of debt associated with these properties in 2016.

The REIT has announced a new board leadership structure, with Michael Malter elected by the board of trustees to serve as its independent chairman. Scott Davidson, RAIT's current president, is now RAIT's ceo and is appointed to RAIT's board of trustees. Davidson succeeds Scott Schaeffer, RAIT's former ceo, who has resigned as ceo and as a member of the board to become the full-time chairman and ceo of IRT.

Schaeffer will serve as a consultant to RAIT for the 12-month period following the closing. James Sebra, RAIT's current cfo, will continue as cfo of RAIT until the later to occur of 31 March 2017 or the filing of RAIT's Form 10K for the fiscal year ending 31 December 2016, after which time he will become the full-time cfo of IRT. RAIT is currently in the process of identifying a new cfo to replace Sebra.

Insurance-linked securities

Capital markets platform launched

Liberty Mutual Insurance has created a new capital markets platform. Dubbed Limestone Capital Markets, it has been capitalised with around US$160m of investors' capital.

The platform has launched an inaugural multi-year collateralised reinsurance transaction led by the new Bermuda domiciled firm, Limestone Re. It will provide exposure for investors in risks from US property catastrophe, US homeowners and London Market specialty insurance.

Insurance-linked securities

Insurance merger agreed

Fairfax Financial Holdings and Allied World Assurance Company Holdings have entered into a merger agreement, pursuant to which Fairfax will acquire all of the outstanding registered ordinary shares of Allied World. Based on Friday's closing stock price for Fairfax of C$614.45, Allied World shareholders will receive a combination of Fairfax subordinate voting shares and cash equal to US$54 per Allied World Share, for a total equity value of approximately US$4.9bn. The share offer price represents a premium of 18% to the closing price of US$45.77 per Allied World Share on 16 December 2016.

Allied World's position as a global property, casualty and specialty insurer and reinsurer, its major worldwide presence and its disciplined approach to underwriting make it a natural candidate to join Fairfax's expanding worldwide operations, the two firms say. Allied World will be able to leverage Fairfax's expertise in Canada, the US and international insurance and reinsurance markets, thus enhancing its global product offering and providing it with expanded underwriting opportunities and support.

It is intended that the transaction will be effected by way of an exchange offer, followed by a squeeze-out merger. However, it is subject to a sufficient number of outstanding Allied World Shares being tendered, as well as other approvals and customary closing conditions. Closing of the transaction is expected to occur in 2Q17.

Allied World will operate within the Fairfax group on a decentralised basis after closing.

RMBS

DOJ files suit, agrees settlements

The US Department of Justice has filed a civil complaint in the Eastern District of New York against Barclays Bank and several of its US affiliates, alleging that the bank engaged in a fraudulent scheme to sell RMBS supported by defective and misrepresented mortgage loans. Separately, Credit Suisse and Deutsche Bank have reached settlements in principle with the DOJ in connection with their legacy RMBS activities.

As alleged in the DOJ's complaint against Barclays, from 2005 to 2007, the bank's personnel repeatedly misrepresented the characteristics of the loans backing securities they sold to investors, who incurred billions of dollars in losses as a result. The suit also names as defendants two former Barclays executives: Paul Menefee, who served as head banker on the bank's subprime RMBS, and John Carroll, who served as its head trader for subprime loan acquisitions.

The alleged scheme involved 36 RMBS deals, securitising over US$31bn worth of subprime and Alt-A mortgage loans. The complaint alleges that in publicly-filed offering documents and in direct communications with investors and rating agencies, Barclays systematically and intentionally misrepresented key characteristics of the loans it included in these RMBS deals.

The DOJ alleges that Barclays securitised thousands of loans that its due diligence vendors graded as materially defective, as well as hundreds more that were delinquent or in default at the time of securitisation. Vendors also told the bank that large percentages of the loans they reviewed violated the lenders' underwriting guidelines or the relevant law, or involved borrowers who lacked the ability to repay. Additionally, it was told that the appraised values of significant percentages of the mortgaged properties were overstated and that thousands of those properties were underwater when they were securitised.

Over half of the underlying residential mortgages in the securitisations defaulted.

The complaint alleges violations of the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA), based on mail fraud, wire fraud, bank fraud and other misconduct. FIRREA authorises the Attorney General to seek civil penalties up to the amount of the gain to the violator or the losses suffered by persons other than the violator.

Meanwhile, under the terms of Credit Suisse's settlement, it will pay to the DOJ a civil monetary penalty of US$2.48bn. In addition, the bank will provide consumer relief totaling US$2.8bn over the course of five years post-settlement.

The settlement would release Credit Suisse from potential civil claims by the DOJ related to its securitisation, underwriting and issuance of RMBS. It is subject to the negotiation of final documentation and approval by the Credit Suisse board of directors.

Under the terms of its settlement agreement, Deutsche Bank has agreed to pay a civil monetary penalty of US$3.1bn and to provide US$4.1bn in consumer relief. The consumer relief is expected to be primarily in the form of loan modifications and other assistance to homeowners and borrowers, and be delivered over a period of at least five years. The settlement is also subject to the negotiation of definitive documentation.

ABS

Lower credit MPL deal prepped

SoFi is readying its thirteenth rated student loan securitisation, which is expected to be sold in a privately negotiated transaction. The US$130.66m ABS, dubbed SoFi Professional Loan Program 2016-F, is backed by refinanced student loans originated through its online platform and is unusual in that a substantial proportion of the loans have lower credit scores than its previous transactions.

Moody's has assigned provisional ratings of A2 to the US$40.66m variable rate class A notes, A2 to the US$82.8m fixed rate A2s and Baa2 to the US$7.2m fixed rate class Bs. Unusually for securitisations backed by SoFi originated loans, SoFi 2016-F has a collateral pool backed by a high number of borrowers with credit scores of less than 680 (accounting for 66% of the total pool) and the deal has a cumulative net loss expectation of 9.25%.

Moody's adds that despite the lower credit score of the collateral pool, credit quality is supported by a high verified annual borrower income of US$152,612 and monthly free cashflow of US$6,244, excluding loans in school. A further credit strength is the short deal life, with a weighted-average remaining term of 159 months, compared with 180-300 months for most other student loan pools.

The rating agency has assumed a higher default assumption of 2.7% for borrowers with a credit score of below 680. This compares to a default assumption of 1.6% for borrowers with credit scores of above 680.

Concentration risk is a further credit challenge, with loans to the employees of a single employer making up 21.8% of the collateral in the pool, which increases the chance of pool performance volatility. This is reflected in the assignation of a higher stressed default rate for that segment.

ABS

Further FFELP ABS extended

Navient has amended the transaction agreements for US$170m of ABS bonds backed by FFELP student loans. The amendments extended the legal final maturity date on the B tranches of SLC Student Loan Trust 2005-3, SLC Student Loan Trust 2006-1 and SLM Student Loan Trust 2005-8 to 2055, as well as the B tranche of SLM Student Loan Trust 2006-7 to 2056.

Earlier this month, Navient extended the legal final maturity date on the SLM Student Loan Trust 2013-3 A3 tranche to 2055 and the B tranche to 2076, as well as the B tranche of SLM Student Loan Trust 2012-5 to 2075. The move affected US$706m of bonds.

Since December 2015, the legal final maturity dates on nearly US$9.3bn of bonds from Navient-sponsored FFELP securitisations have been extended.

ABS

Punch acquisition agreed

Heineken UK has agreed a back-to-back deal with Patron Capital vehicle Vine Acquisitions to acquire Punch Securitisation A, which is secured by approximately 1,900 pubs across the UK. The move follows Vine Acquisitions' recommended cash offer of 180p per share for Punch Taverns, which operates over 3,000 pubs, valuing the company at £403m.

Heineken UK will pay an aggregate consideration of £305m for the shares in Punch A and assumed intercompany debts due from Punch A to Punch Taverns. As at 20 August, external debts and derivatives of Punch A amounted to £962.3m. On 1 November 2016, Punch Taverns reduced the Punch A external debt by redeeming £65m of its class B4 notes.

The transaction is subject to Vine Acquisitions' offer for Punch Taverns receiving approval from Punch shareholders and the acquisition of Punch A by Heineken UK being approved by the regulatory authorities. Assuming satisfactory approval, completion is expected by end-1H17.

Following completion, the pubs acquired by Heineken UK will be operated for six months by Vine Acquisitions under a transitional services agreement, after which they will be fully integrated into the existing Star Pubs & Bars pub business.

Heineken says it believes that there is compelling strategic rationale for enlarging its existing pub business through the acquisition of and subsequent investment in the Punch A portfolio. The portfolio is "highly complementary" to its Star brand and the company intends to fully integrate the pubs into Star, becoming the third-largest pub business in what remains a highly fragmented pub market.

Punch reported its full-year preliminary results for the 52 weeks ended 20 August 2016 on 8 November 2016, when Punch A reported full-year revenue of £242.9m and underlying full-year EBITDA of £109.6m.

ABS

SLABS downgrades trump upgrades

Moody's has this month concluded its review of transactions potentially affected by changes to its FFELP ABS methodology, published in the summer (SCI 15 June). Of the 504 tranches in 194 transactions that the agency took rating action on, there were 262 downgrades, 133 confirmations and 109 upgrades.

The average downgrade magnitude was 5.2 notches and the average upgrade magnitude was 2.8 notches. The largest magnitudes were for tranches maturing in less than 10 years.

Before the methodology update, 90% of outstanding FFELP ABS were rated Aaa. Now the figure is 61%.

Most of the upgraded tranches had long-dated maturities, particularly among subordinated tranches. Most of the downgraded tranches had close-dated maturities and slow pool amortisation.

Under the new methodology, Moody's derives the expected loss and weighted average life of each tranche by running 28 cashflow scenarios and using the weights associated with each scenario. The ratings that it assigns are primarily a result of its analysis indicating that the expected losses for a given expected weighted average life of a tranche is consistent with the expected loss benchmarks published in its idealised loss tables.

ABS

Fleet ABS reviewed on criteria change

Moody's has published its updated methodology for rating rental car and rental truck ABS, following an RFC on the approach (SCI 13 July). The agency has updated how it analyses certain risk factors - such as the sponsor probability of default, fleet composition, disposal value calculation, correlation and default risk horizon - while leaving the general framework unchanged. The revised methodology also incorporates historical data on used-vehicle values and historical performance of the securitisations.

Specifically, Moody's will now use the sponsor's probability of lease rejection to model its probability of defaulting on lease payments, rather than apply a stress to the sponsor's rating depending on the target rating of the notes. The mix of vehicle manufacturers for Moody's simulation analysis - specified by levels of credit quality - will also now reflect the historical composition of the sponsor's fleet, rather than track more closely the actual recent composition of the fleet by manufacturer.

Additionally, Moody's will apply an empirically derived haircut to the net book value of the vehicle fleet to calculate its projected market value at the time of liquidation following a sponsor default, rather than use depreciation curves for each manufacturer that are independent of the net book value to calculate the projected market value. The analysis will also incorporate default correlation among vehicle manufacturers and between the rental car company and vehicle manufacturers, rather than simulate independent default events.

Finally, the agency will apply a fixed time horizon to determine the default probabilities of the sponsor and the vehicle manufacturers and to derive the expected loss benchmark for revolving transactions, rather than adjust the modelled horizons depending on the remaining term of the transaction.

Following its initial assessment of securities under the updated methodology, Moody's has placed on review for upgrade the ratings on AB Funding, eight tranches of Avis Budget Rental Car Funding deals, one tranche of Centre Point Funding and two junior tranches from Hertz Vehicle Financing (HVF). The agency has also placed on review for downgrade the ratings on seven senior tranches of ABS issued by HVF II and two senior tranches issued by HVF.

It expects to conclude the review of the affected ratings within six months. During the review period, Moody's will conduct detailed analysis of the factors that can affect the credit quality of the transactions, while analysing any additional information provided by the sponsor. The agency plans to publish transaction-specific assumptions upon the conclusion of its review.

Structured Finance

Capital framework 'should be retained'

The EBA has recommended that that the EU retains its current risk-sensitive framework for bank regulatory capital, against the background of the weak evidence on the existence of pro-cyclical effects due to the CRDIV/CRR framework. The EBA adds that if pro-cyclicality risks were to become more material, the EU financial regulatory framework has various tools at its disposal, which could in principle be used.

The report has been published after concerns were raised that risk-sensitive bank capital requirements, as laid down in the Capital Requirements Regulation (CRR) and Capital Requirements Directive (CRD), create unintended pro-cyclical effects by reinforcing the endogenous relationships between the financial system and the real economy. It is also in response to a request from the European Commission to understand whether CRDIV/CRR requirements exert significant effects on the economic cycle and, if so, whether any remedial measures are justified.

The report has several findings, such as that banks' capital requirements, since 2008, appear to have developed on a relatively stable basis and series on banks' IRB risk do not show a particularly cyclical pattern. Also, the surprising lack of a strong correlation between the economic cycle and banks' risk-weighted assets (RWAs) and underlying parameters is evident in various regression specifications at bank and portfolio level.

The report further finds that higher capital requirements due to CRD/CRR could have exerted some restricting impact on banks' loan supply, but in the period observed results indicate that it is likely that broader macroeconomic and financial factors had a predominant impact on banks' lending decisions. It concludes that further econometric analysis provided only limited evidence of any significant pro-cyclical effect induced by the regulatory framework on the real economy.

Structured Finance

RFC issued on FX risk

S&P has requested comments on its methodology and assumptions for FX risk in structured finance transactions. The proposed FX risk criteria provide rating-specific asset depreciation stress assumptions for the behaviour of FX rates in global structured finance transactions with unhedged or partially hedged currency exposures.

FX risk in securitisations arises when the asset cashflows and liabilities are denominated in different currencies. S&P says it assumes that the asset cashflows will depreciate over time if no currency hedges mitigate the currency risk exposure.

The agency has developed an analytical approach for modelling FX exposures by using a non-parametric distribution. It estimates and incorporates monthly currency depreciation stress curves as inputs into the cashflow analysis to evaluate a transaction's potential currency exposure risk.

The proposed criteria apply to all new and outstanding global structured finance transactions with unhedged or partially hedged foreign currency exposures ranging from at least a one-month maturity up to 15 years (they do not apply to FX exposures with less than a one-month maturity). They may also apply to other transactions where currency risks exist.

If adopted, the proposal is expected to impact a limited number of outstanding ratings. Comments on the criteria are invited by 25 January 2017.

Structured Finance

Primary servicing volumes up

In its latest quarterly US RMBS Servicer Handbook, Fitch highlights the rapid growth of portfolios among smaller mortgage servicing companies. The portfolios of US special servicers with loan counts of less than 400,000 are growing at a faster pace than the servicing industry as a whole, according to the agency.

These smaller special servicers reported an average year-over-year growth of nearly 20% (weighted by portfolio size). In contrast, the weighted average portfolio growth for all Fitch-rated servicers was approximately 2%.

While special servicers continue to maintain robust capabilities in handling distressed loans, many have expanded into performing servicing in order offset portfolio run-off. Primary serviced loans increased by 52% on average across their portfolios.

Non-bank servicers increased their use of loan modifications as a form of loss mitigation to 72% from 64.8%.

The Handbook also shows that banks kept full-time staffing level, but increased temporary staff by 2.7%. Meanwhile, staffing at non-banks decreased by 4.3% on average.

Capital Relief Trades

EIF in UK CRT first

The EIF has signed a securitisation guarantee deal with RBS, providing capital relief on a £432m portfolio of UK SME and mid-cap loans in the healthcare sector. It is the EIF's ninth capital relief trade since 2015 but its first in the UK.

EIF's guarantee allows RBS to release capital on a portfolio of over 1,900 loans. The freed-up capital will provide extra capacity to grow the bank's SME and small mid-cap portfolio. The transaction was structured synthetically on a blind pool basis and the risk transfer was achieved with the assets on the bank's balance sheet.

CDS

iHeart credit event called

ISDA's Americas credit derivatives determinations committee has resolved that a failure to pay credit event occurred in respect of iHeart Communications. The move follows the company's failure to repay the principal amount of the US$57.1m 5.50% senior notes due 2016 held by Clear Channel Holdings. This is because iHeart is seeking to ensure that the aggregate principal amount of certain notes it has issued does not fall below US$500m, thereby avoiding triggering a springing lien in favour of certain debtholders.

The DC also resolved to hold an auction in respect of outstanding CDS transactions referencing the entity. It is reconvening today (22 December) to discuss auction details and will release further information in due course.

Separately, the DC determined that a restructuring credit event had not occurred with respect to iHeart Communications.

CLOs

EBRD lends weight to Greek push

The EBRD is investing up to €50m in the senior notes of a Greek SME CLO dubbed Alpha Proodos. The underlying loans in the asset pool are originated by Alpha Bank of Greece.

The securitised pool will have a one-year revolving period. The total CLO size is expected to be €640m, split between €320m in senior notes and €320m in mezzanine and junior notes.

The EBRD is subscribing to €50m of the senior notes. The EIB and Citibank will take the rest of the seniors, with Alpha taking the mezz and junior notes.

Securitisation has not been available as a funding source for Greek banks for some time. The EBRD and Alpha Bank hope that the completion of this deal will attract more commercial investors to collateralised debt issues, providing banks with a viable alternative to volatile short-term deposits and Eurosystem funding, and also strengthening investors' confidence in the country's banking system.

CMBS

Mesdag retranching rated

Fitch and S&P have rated Commercial Mortgage Funding, a securitisation of a €27.9m portion of the €370.6m Mesdag (Delta) class A notes. The transaction is financed by the issuance of three long-dated pass-through principal-only notes, due January 2035.

The notes comprise £23.4m BBB+/BBB class As, £2.2m BBB/BB+ class Bs and £2.2m BB/BB- class Cs. Mesdag (Delta), which is due in January 2020, is a CMBS financing one loan backed by 55 Dutch properties valued at €551m as of December 2015. Principal and interest receipts from the note are available to the issuer to amortise the new notes in a fully sequential fashion.

Fitch notes that the combination of a principal-only format, the fully subordinated tranching structure of the new notes and a back-dated legal final maturity are the relevant pillars supporting the uplift in the ratings of the class A and B new notes above the rating of Mesdag (Delta) class A notes, to which the class C new notes are credit-linked. The principal-only format means the new notes are capable of defaulting only by remaining outstanding at their legal final maturity date in January 2035 or upon a liquidation of Mesdag (Delta) that leads to a loss on the Mesdag (Delta) class A notes.

The loan underlying Mesdag (Delta) has paid down to €595m currently from €638.4m in 2007, through amortisation, cash sweep and sales proceeds. With a securitised LTV of 111% reported in October 2016, the loan is expected to default at maturity this month.

Fitch believes that thereafter all proceeds will be applied on each payment date first towards Mesdag (Delta)'s revenue expenses (including interest on all its notes) and then towards repayment of its class A notes. Post-enforcement, the agency understands from the documentation that Mesdag (Delta) would prioritise interest and principal owed under its class A notes (after having cleared certain senior ranking claims) above all other amounts owing to its creditors.

The timing of Mesdag (Delta) note enforcement is therefore of relevance to holders of the new notes, since it would trigger preservation of the bulk of remaining loan collateral value towards repayment of the Mesdag (Delta) class A notes. However, as the issuer of the new notes owns only a minor holding of this class and the Mesdag (Delta) note trustee is expected to request formal indemnification before taking certain actions, Fitch assumes the associated uncertainty will delay note enforcement action by five years after any Mesdag (Delta) issuer event of default.

CMBS

Class X appeal dismissed

The English Court of Appeal has reached the same conclusion regarding the Titan CMBS class X claim as the High Court in April (SCI passim). Accordingly, the appeal by Credit Suisse Asset Management - the class X noteholder in the TITN 2006-1, 2006-2, 2007-2 and 2007-CT1 deals - has been dismissed.

The class X noteholder had issued proceedings under Part 8 of the of the Civil Procedure Rules seeking a number of declarations in relation to the alleged miscalculation of the class X interest rate. The latest judgment states that the 'per annum interest rate' in the definition of 'net mortgage rate' is the ordinary rate of interest payable on the underlying loans, exclusive of any element of default interest.

It continues: "So default interest payable on the underlying loans is not to be taken into account in calculating the class X interest rate. There was also commercial logic in excluding default interest."

Credit Suisse Asset Management can apply for permission to appeal to the Supreme Court within 28 days of the judgment of the Court of Appeal.

CMBS

Lack of occupancy triggers EOD

The 129-131 Greene Street loan, securitised in GSMS 2014-GC26, has been transferred to special servicing due to an event of default caused by a tenant trigger event. Fitch designated the asset as a loan of concern last month.

129-131 Greene Street is secured by a two-storey condo in New York City, 100% leased to a Google subsidiary on a 10-year triple-net lease that matures in 2024. Google never took occupancy of the property and it is now being marketed for sublease.

A cashflow sweep is triggered when the tenant does not take physical possession of the space and open it to the public for customary business. The servicer says it has attempted to set up the cash sweep account since January without success and the borrower's continued lack of cooperation is considered a continuing event of default.

The loan has a maturity date of November 2019 and remains current, with a servicer-reported year-to-date September 2015 DSCR of 1.54x. The tenant has the option to terminate its lease in 2019.

Fitch notes that the sponsor, Lucky Bhalla, cashed out approximately US$14.5m as part of this transaction. The sponsor acquired the property in December 2011 for US$6.85m, when the property was fully leased to a furniture store.

At issuance, a dark value analysis was conducted to test the probability of recovery under an adverse credit event to Google. In the event Google were to vacate the property, Fitch assumed market rent declines of 5%, downtime between leases, carrying costs and re-tenanting costs, and compared the resulting dark value to the outstanding loan balance. The agency's dark value of US$18.8m covers the implied high investment-grade proceeds for the loan.

Insurance-linked securities

Contingent capital arranged

SCOR has launched its third contingent capital facility in the form of a three-year contingent equity line. The facility provides the group with €300m coverage in case of extreme natural catastrophe or life events impacting mortality, which it says will enable it to protect its solvency.

The equity line facility is provided by BNP Paribas and will replace the current contingent capital facility, which comes to an end on 31 December 2016, with €100m more protection. SCOR says the solution offers a cost-effective alternative to traditional retro and ILS. The firm estimates that the annual probability of any of the triggers occurring over the programme is less than 2%.

Under the new facility, a drawdown may result in an aggregate increase in share capital of up to €300m, in respect of which SCOR has entered into a firm subscription commitment with BNP Paribas. The issuance of the shares would be triggered when SCOR has experienced total annual aggregated losses or claims from natural catastrophes or extreme events impacting mortality claims above a certain threshold between 1 January 2017 and 31 December 2019.

BNP Paribas will resell the shares by way of private placements and/or sales on the open market. In this respect, SCOR and BNP Paribas have entered into a profit-sharing arrangement, whereby 75% of the gain will be retroceded to SCOR.

Risk Management

CCP equivalence determined

The European Commission has determined that India, Brazil, New Zealand, Japan Commodities, United Arab Emirates and Dubai International Financial Centre (DIFC) have equivalent regulatory regimes for central counterparties to the European Union. The Commission has also determined that the rules governing certain financial markets in Australia, Canada, Japan and Singapore can be deemed equivalent to those in the EU, thereby allowing EU corporates to apply the same clearing treatment as in Europe for their transactions on these exchanges.

The decision confirms that non-EU CCPs in the relevant jurisdictions meet the EU's regulatory standards. The move follows previous determinations made for: Australia, Singapore, Japan and Hong Kong in October 2014; Canada, Switzerland, South Africa, Mexico and the Republic of Korea in November 2015; and the US CFTC in March 2016.

The EU issued a determination of equivalence for US designated contract markets under the CFTC oversight in July 2016.

Risk Management

Pension extension for OTC clearing

The European Commission is extending transitional relief for pension scheme arrangements (PSAs) from central clearing of OTC derivative transactions until 16 August 2018. Without such an extension, PSAs would have to source cash for central clearing, which would require "very far-reaching and costly" changes to their business model and could therefore ultimately affect pensioners' income.

The Commission believes CCPs need the additional time to find solutions for pension funds. Its decision takes the form of a delegated act under EMIR, which will be under review next year.

RMBS

Strong due diligence in place

With the exception of a few isolated outliers, strong due diligence is firmly in place for most post-crisis US RMBS, according to Fitch in its inaugural report on third-party review (TPR) firms that perform RMBS due diligence. The agency's review - which encompassed over 100,000 loans from across 92 securitised deals - demonstrated exceptional results so far for loans originated in recent years.

The application of Fitch's diligence criteria resulted in 'A-B' grades to virtually its entire universe of rated RMBS collateralised with loans originated after the financial crisis, reflecting no worse than non-material issues. Diligence grades on re-performing loans that were originated prior to the financial crisis show a higher percentage of more material issues, according to Amit Arora, director, RMBS at Fitch.

"For recent RPL transactions, examples of 'C-D' grades include missing required disclosures such as the note, mortgage, truth in lending and final HUD1s," says Arora. "The few 'C-D' grades on recently originated loans are generally related to the initial TRID loan reviews not yet incorporated into Fitch criteria and market participants not having a clear approach to cure the TRID exceptions."

Under Fitch's June 2016 revised criteria, the majority of loans previously graded 'C-D' for TRID compliance would now be classified as 'B', due to the exception being classified as non-material.

Over 80% of all due diligence results reviewed by Fitch have been provided by two firms, although the number of active TPR firms varies by RMBS sector. "Due diligence on recently originated loans generally reflects solid operational controls and post-crisis industry improvements in policies and procedures," adds Arora.

RMBS

Flex mod programme 'credit neutral'

The Flex modification programme announced by Fannie Mae and Freddie Mac last week (SCI 15 December) will have a neutral credit impact on the GSEs' credit risk transfer securitisations, says Moody's. The rating agency believes the volume of modifications and re-default performance under the Flex programme will be comparable to current levels and performance.

The Flex programme has a formal payment reduction target of 20%, which is new for GSE modification programmes. GSE borrowers with a monthly payment reduction of 20% or less through modification have thus far gone on to re-default within 12 months in around 19% of cases, and the outcome is expected to be broadly similar under Flex.

Additional payment reductions have a track record of improving re-default performance only slightly. A payment reduction of 20%-30% has resulted in an average re-default rate of 17%, while a 30%-40% reduction has resulted in a 16% re-default rate.

The volume of modifications should be steady as the Flex programme benefits all borrowers regardless of their stage of delinquency and incorporates the best practices from predecessor programmes. Borrowers have used the streamlined modification programme more than the other two GSE modification programmes since 2013 and these programmes share many similarities with Flex.

Servicers must implement the Flex programme by 1 October 2017. Until then, the GSEs' standard and streamlined modification programmes will remain in effect, with the exception of HAMP, which expires at year-end.