Contents

Capital Relief Trades

Cash versus synthetic weighed

Balance sheet securitisations - whereby balance sheet relief is achieved via true sale - are gaining traction in Europe (SCI 25 August 2016). The different motivations for executing a cash versus a synthetic capital relief trade were discussed recently at SCI's Capital Relief Trades Seminar.

"Generally, we've come to see balance sheet securitisations get far more relevant and important recently," confirmed Serdar Ozdemir, director of structured debt capital markets at Rabobank.

To reduce the size of its balance sheet, his firm began by selling mortgages directly into the market, before recognising that balance sheet securitisation can help reduce the leverage ratio. "A good thing about balance sheet securitisations is that they can target a different investor base. They have different risk/return requirements and help the issuer with diversifying their investor base," Ozdemir added.

Synthetic securitisation is typically the preferred option if the goal is purely to reduce risk-weighted assets, however. "The contracts can be more bespoke and can be tailored to meet investor needs and internal needs," Ozdemir continued. "Cash securitisations require more effort and are much more cumbersome if the goal is to achieve risk and regulatory relief only. The many benefits of synthetic securitisations have been exploited to an extent there."

Nevertheless, the market lacks consistency, which makes it difficult for issuers to implement capital relief tools in long-term capital allocation plans. "It's hard to see how banks can rely on synthetic CRT transactions when there is lack of certainty around future regulation and how this will impact RWAs for assets and securitisations," said Ozdemir.

He added that some mortgage lenders are considering using crowdfunding to originate mortgages. "Lenders are now very much looking at how to continue to originate assets, without increasing their balance sheet size or increasing RWAs. In some ways, these 'front-end' solutions are necessary if back-end distribution - like CRT transactions - are harder to achieve."

RB

CMBS

Macy's, Sears closures affect CMBS

Macy's has revealed a list of 68 stores that it will close in the near term, while Sears has announced it will close 150 Sears and K-Mart stores. There are CMBS implications for both.

Of the 68 Macy's locations, 63 will be closed in early spring and two in mid-2017. There is CMBS exposure for 31 loans totalling US$3.4bn. Of this exposure, Morgan Stanley CMBS analysts note that 86% is to CMBS 2.0 deals, with the 2012 vintage having US$1.5bn exposure.

The Markit CMBX index has exposure to 10 properties encumbered in 13 loans totalling US$1bn. CMBX.7 has the greatest exposure at US$592m.

The Macy's loans which touch CMBS are: Bangor Mall (securitised in MSC 2007-IQ16); City Place-A note and City Place-B note (both CSMC 2007-C1); Collin Creek Mall (JPMCC 2001-CIB2); Cottonwood Mall (COMM 2014-CR17); Fashion Show Mall (BBUBS 2012-SHOW); Fort Steuben Mall (JPMCC 2005-CB12); Great Northern Mall (BSCMS 2004-PWR3); Investcorp Retail Portfolio 1 (BSCMS 2006-PW11); Jefferson Mall (JPMCC 2012-CBX); Lakeland Square Mall (COMM 2013-CR7); Layton Hills Mal (MSC 2007-IQ14); Oakdale Mall (WFRBS 2011-C3); Parkdale Mall & Crossing (GSMS 2011-GC5); Sarasota Square (COMM 2013-CR9); The Mall at Tuttle Crossing (both MSBAM 2013-C10 and MSBAM 2013-C11); Valley View Mall (JPMCC 2010-C2); and Westfield Mission Valley (both WFRBS 2013-C16 and WFRBS 2013-C17).

The Sears loans which touch CMBS are: Albany Mall (DBUBS 2011-LC3A); AOK Portfolio (JPMB 2015-C27); Big Kmart - Jacksonville (CD 2007-CD4); Boulevard Mall (GCCFC 2007-GG9); Capital City Mall (MSC 2012-C4); Central Mall (MSC 2005-IQ9); Charleston Town Center (BSCMS 2007-T28); Columbus Park Crossing (both COMM 2016-DC2 and DBJPM 2016-C1); EDT Retail Trust Portfolio (JPMCC 2010-C2); Emster Portfolio (BACM 2005-3); High Ridge Center (JPMCC 2003-ML1A); Jasper Mall (BSCMS 2006-PW13); Kmart - Parkersburg (LBUBS 2005-C2); Kmart Greenwood (LBUBS 2005-C5); River Valley Mall (LBUBS 2006-C1); Stadium Marketplace (JPMCC 2004-LN2); Turnpike Mall (JPMCC 2011-C3); Uintah Plaza (CSMC 2008-C1); Walden Galleria (JPMCC 2012-WLDN); Walnut Hill Plaza (MLCFC 2006-3); and Westfield Centro Portfolio (JPMCC 2006-LDP7).

Morningstar Credit Ratings notes that the closures will have varying effects, but that importantly there is no overlap between Sears and Macy's anchor box closings, which might be particularly tough for a mall operator to manage. Weaker malls might find these closures particularly damaging, although stronger malls could see the vacancies as an opportunity to create additional value.

"In many cases, the loss of an anchor likely has minimal immediate impact on rental revenue. However, co-tenancy clauses and the loss of inline tenants over time can be very detrimental," says Morningstar. "We expect to see more announcements of store closings over the next few weeks as weaker than expected holiday sales at many retailers may result in an examination of the portfolio."

JL

RMBS

NAIC designations for actual loss CAS

The NAIC has assigned designations to all of Fannie Mae's CAS risk transfer transactions for its 2016 filing year, except for two. It is the first time that actual loss CAS deals have received NAIC designations.

All M1 bonds received the highest NAIC 1 designation. In fixed-loss transactions, all M2 bonds also received a designation of NAIC 1, whereas by comparison there were six fixed-loss M2 bonds below NAIC 1 in 2015.

For the actual loss deals, two M2 bonds received NAIC 1, six received NAIC 2 and one received a NAIC 3 designation. The only actual loss M2 bond below NAIC 2 was CAS 2016-C05 2M2, which Wells Fargo RMBS analysts believe missed out on a higher designation because of shorter seasoning than similar bonds from other deals.

The two deals that are without a NAIC designation are CAS 2016-C06 and CAS 2016-C07. They are expected to be modelled before the middle of this month, however.

As the currently non-modelled CAS 2016-C07 2M2 bond has a similar credit profile and structure to the NAIC 3 designated CAS 2016-C05 2M2, but less seasoning and marginally less HPA, the Wells Fargo analysts ultimately expect it to receive NAIC 3 or lower.

The analysts believe NAIC designations are favourable for liquidity in the credit risk transfer sector. "In our view, [the designations are] good news for the CRT sector, as it allows insurance companies to participate in a broader range of CRT securities. Given that the majority of CAS M2 bonds are non-investment grade, the NAIC 1 or 2 designations they received should be favourable. Overall, the expanded investor base should improve liquidity, all else equal, and can potentially drive spreads tighter," they conclude.

JL

Structured Finance

Law firm nabs SF vet

Norton Rose Fulbright has hired Patrick Dolan as a partner to the firm, joining from Dechert. He focuses his practice on ABS and MBS - often with innovative structures - representing warehouse lenders, issuers, underwriters, investors and multi-seller commercial paper conduits. Dolan has worked on financings and securitisations of various asset types, including PACE bonds, tax liens, structured settlements, marketplace loans, trade receivables, aircraft leases, subprime auto loans, life insurance and credit tenant leases.

Structured Finance

Investment firm grabs boutique

New York Life Investments has acquired Credit Value Partners (CVP), an investor in opportunistic and distressed debt and high yield corporate credit. The acquisition, which is subject to customary closing conditions, is expected to close in 1Q17 but terms of the transaction were not disclosed.

The acquisition is part of New York Life's broadening of its investment offering, which now incorporates private equity, mezzanine, equity co-investing, middle market lending, real estate, hedged strategies and real assets. These strategies are managed by New York Life Investments and its boutiques, which include Candriam Investors Group, Cornerstone Capital, GoldPoint Partners, IndexIQ, MacKay Shields and Private Advisors.

Berkshire Capital Securities acted as exclusive financial advisor to CVP and Tannenbaum Helpern Syracuse & Hirschtritt acted as legal advisor.

Structured Finance

SF firm bulks out

Brigade Capital Management has hired Tom O'Shea to its team in London. O'Shea previously worked for Castle Hill and before that was partner at GoldenTree. Brigade confirmed that O'Shea starts with the firm this month.

Structured Finance

Insurer inks rival buyout

Arch Capital has completed its acquisition of United Guaranty Corporation (UGC) from American International Group (AIG) (SCI 16 August 2016). The acquisition of UGC expands Arch's existing mortgage insurance businesses by combining UGC's position as the market leader in the US private mortgage insurance industry and helps to diversify its business profile and customer base.

Arch Capital comments that the expansion of its mortgage insurance business will boost its specialty insurance and reinsurance businesses, which continue to play a central role in its global operations. The firm adds that diversifying across segments and product lines remains fundamental to its corporate strategy and allows it to deploy capital to those areas offering the best opportunities.

CLOs

Firm inks CLO buyout

Marble Point has acquired American Capital CLO Management (ACCLOM), an investment manager with approximately US$3.4bn in AUM across eight CLO vehicles. Marble Point and affiliates will acquire majority equity positions in seven of the CLOs, with ACCLOM and the CLOs expected to be rebranded as part of the Marble Point platform.

Marble Point hopes that the transaction will diversify and expand its investor base, while accelerating its business plans and objectives. Dechert served as legal counsel to Marble Point and Winston & Strawn served as legal counsel to American Capital.

ABS

New lows for prime chargeoffs

US prime credit card ABS chargeoffs reached a new low of 2.33% in December, says Fitch. Retail credit card metrics were mixed.

The rating agency's prime credit card chargeoff index is now 10bp below its previous low record of 2.43%, which was reached in October 2016. It is 10% lower year-over-year and nearly 80% lower than the high reached in September 2009.

Fitch's prime credit card 60-plus day delinquency index rose 3bp last month to 1.04%. However, that is still comfortably below the historical high of 4.54% reached in December 2009.

The decision by the FOMC last month to raise the target range for the federal funds rate from between 0.25% and 0.5% up to between 0.5% and 0.75% should have a negligible impact on the vast majority of credit card borrowers and ABS metrics in the short to medium term, argues Fitch. The rating agency notes that the consumer confidence index is at a 15-year high of 113.7.

Fitch's prime credit card gross yield index rose for the third straight month to 19.26%, while the three-month excess spread index held steady at 13.87%, down just 3bp. The agency's prime monthly payment rate (MPR) index retreated for the second month in a row, from 28.51% in November to 28.33% in December.

Fitch's retail credit card chargeoff index increased for the fourth straight month to 6.85%, but is only 6% higher year-over-year. The retail 60-plus day delinquency index held steady at 2.63%, after increasing the past three months. The index stands at its highest value since December 2014.

Fitch's retail credit card MPR index improved to 15.67% for the month of December. The retail credit card gross yield index fell for the second month in a row to 29.24%, while the three-month average excess spread index fell from a historical record of 19.49% to 19.01% for the month of December.

Structured Finance

'Basel 4' meeting postponed

A meeting of the Basel Committee group of central bank governors and heads of supervision (GHOS), originally planned for early January, has been postponed. The Committee says that more time is needed to finalise the Basel 3 framework's final calibration, before the GHOS can review the package of proposals, although it expects to complete this work "in the near future".

The cancelled meeting had been convened to consider reforms intended to finalise Basel 3 capital requirements (sometimes referred to as Basel 4), which seek to restrict the use of internal risk models and promote the revised standardised approaches. But disagreements on the proposed rules - seemingly around capital floors, in particular - remain between some US and European members (SCI 21 November 2016).

The meeting is believed to have been delayed until at least March.

Structured Finance

'Transparency over risk retention' advised

Securitisation of European SME loans would not necessarily lead to lower credit standards, according to the BIS. In a recent paper, analysts at the bank also suggest that while risk retention rules might be necessary for larger transactions due to the presence of moral hazard, such retention rules aren't necessary for smaller firms.

The research from BIS explores the presence of asymmetric information in the securitisation market by assessing the correlation between the securitisation (risk-transfer) and the default (accident) probability. It disentangles the adverse selection from the moral hazard component for the many firms with multiple bank relationships.

The analysts find that adverse selection is widespread but that moral hazard is confined to weak relationships, indicating that a strong relationship is a credible enough commitment to monitor after securitisation. Importantly, the selection of which loans to securitise based on observables is such that it largely offsets the negative effects of asymmetric information, rendering the overall unconditional quality of securitised loans significantly better than that of non-securitised ones. Thus, despite the presence of asymmetric information, the research does not find that credit risk transfer leads to lax credit standards.

In terms of policy, the BIS suggests that as the securitisation of larger, transaction-type loans can be characterised by moral hazard, it could be efficient to implement precise regulations on minimum retention. For smaller firms, retention rules may not be advisable and instead the analysts suggest that improving transparency by extending the availability of granular information may be a better option.

Structured Finance

Asset value fund closed

HPS Investment Partners has closed its first European Asset Value Fund, with aggregate capital commitments of €800m. The fund will seek to take advantage of strategic shifts in the European specialty finance sector, where regulatory-induced deleveraging is leading banks to divest of capital intensive and non-core portfolios and platforms.

The fund will focus on building a diversified portfolio of performing assets, as well as origination and infrastructure. Specifically, it will invest in leases and loans backed by assets and receivables, including equipment, information technology, automobiles, aircraft, trucks and other transportation assets. Acquiring and developing scalable platforms will also allow the fund to source new assets and provide direct financing to European SMEs and consumers.

The firm believes that the current market conditions in Europe will provide the opportunity to acquire a highly diverse pool of performing assets, alongside related origination and servicing platforms, in order to deliver attractive risk-adjusted returns while providing capital to the European SME community.

Structured Finance

Issuance estimates revised upwards

Most structured finance markets and their credit conditions seem favourable and in some cases ideal going into 2017, according to S&P's 2017 outlook. The agency has therefore increased its issuance forecast since October, projecting US$365bn-US$375bn total issuance for the US, with China expected to see the second largest issuance at an estimated US$140bn. The global total for 2017 is expected to be between US$705bn-US$760bn.

The rating agency suggests that major policy questions for securitisation in 2017 are the potential privatisation of GSEs, revision of risk retention rules and whether an appropriate and globally consistent capital treatment for structured finance products will be approved. The agency comments that anticipation of these policies has caused the dollar to appreciate as global players are attracted to the US for yield and, looking ahead, future government policies could be beneficial for US consumer-facing markets. The dollar appreciation has already boosted investment into higher-rated structured products.

A risk, however, could be that revised trading policies could lead to a trade war. But, if averted, international markets could be boosted by low foreign currency rates, which would spur exports and securitisation. S&P comments that many international governments seem to recognise securitisation as essential to diversifying funding sources and helping to stabilise financial institutions' balance sheets.

The agency therefore expects more private-label RMBS in Canada, Japan, China, Latin America and Europe. The non-performing loan (NPL) product should help clean and stabilise the balance sheets of financial institutions in China and Europe, and create issuance volumes that could help those markets re-establish ABS as an alternative financing source and investment class.

Additionally, S&P suggests that all sectors have a stable fundamental outlook and rating trend, in part due to expected tax cuts in the US that are expected to result in additional consumer consumption. While the agency puts several ABS sectors on a "weaker collateral performance" outlook, this reflects deterioration from relatively low rates of charge-offs/delinquencies. US credit card ABS loss rates, for example, are expected to rise 50bp-100bp in 2017 from historical lows of 2%.

The sector will still face regulatory challenges, such as high capital cost allocations and risk retention. Although the new administration has mentioned regulatory cutbacks, this could face political hurdles and, as a result, portfolio lenders will likely remain the preferred option for financing and overall SF growth could be moderate.

The agency notes that collateral performance has been stabilising around the globe since the recession and it expects that any policy changes will enhance stable collateral performance in the US. S&P adds that there could be US$1.8trn total in NPLs globally, but the potential securitisation value is likely only 15%-50% of that figure spread over many years. In 2017, the agency expects to see up to US$50bn in NPL securitisation, which makes it a product that will help develop an ABS investor base in many international markets.

Beyond NPLs, S&P suggests that private-label RMBS will be a market to watch in 2017, as US and international regulators address housing funding sources and transition from government-supported mortgage markets to those that can originate and distribute credit and interest rate risk through private channels.

CLOs

CLOIE positive returns continue

The total amount of CLOs paid down in the JPMorgan Collateralized Loan Obligation Index (CLOIE) since the November rebalance through 30 December was US$12.78bn in par outstanding, split between US$1.01bn and US$11.77bn of pre-crisis and post-crisis CLOs. The post-crisis CLOIE added US$19bn across 191 tranches from 43 deals at the December rebalance.

Full-year 2016 CLOIE total returns were 4.69% and 5.19% for the pre-crisis and post-crisis indices respectively. The top performing post-crisis tranches in 2016 were single-B, double-B and triple-B, which returned 23.61%, 21.73% and 12.01%. The top performing pre-crisis tranches were double-B, triple-B and single-A, which returned 10.05%, 6.81% and 5.75%.

CLOIE continued to see positive total returns in every sub-index for the sixth straight month. Post-crisis single-B and double-B tranches returned 4.50% and 2.69% last month.

CLOs

CLO solution dismissed

The District Court for the District of Columbia last month ruled against a risk retention solution for CLOs proposed by the LSTA (SCI passim). The association says it strongly believes that the court erred and that regulatory agencies inappropriately applied the risk retention rule to CLO managers.

CLOs performed extraordinarily well before, during and after the financial crisis. Indeed, the LSTA says that they are not the product that the Dodd-Frank Act intended to fix.

"The risk retention rules will reduce the availability and increase the cost of credit for job-creating American employers that rely on the financing CLOs provide, and the LSTA seeks a resolution that will work for all constituencies," it states.

The association says it will now consider all options, including appealing the decision to the federal Court of Appeals for the DC Circuit.

CLOs

Early CLO redemption mooted

Deutsche Bank is considering whether to exercise its option, as issuer, to redeem the Craft 2013-1 and Craft 2013-2 securities prior to their scheduled maturity date. Craft 2013-1 comprises US$840m floating rate notes due 2022 and Craft 2013-2 comprises €150m floating rate notes due 2022.

According to the offering circular, in considering whether to exercise its option to redeem the notes on the interest payment date scheduled for April 2017, Deutsche Bank may take into account whether it has successfully issued notes in respect of one or more substitute transactions with a portfolio, price, structure and tenor that the bank determines to be sufficient. As issuer, it may at any time decide not to exercise, or to delay the exercise of, its option to redeem the CRAFT 2013-1 and CRAFT 2013-2 notes.

CMBS

Opus completes multifamily Freddie deal

Opus Bank has securitised US$509m of its multifamily loans through a Freddie Mac-sponsored 'Q-deal' securitisation. One class of Freddie-guaranteed notes was issued and purchased by Opus.

Opus says the deal is "a novel transaction that reduces Opus' commercial real estate concentration, lowers its risk weighted assets, increases its total risk-based capital ratio, lowers its loan-to-deposit ratio and improves its liquidity". The bank believes the securitisation strategy enhances its flexibility and optionality.

Freddie's Q certificate programmes differ from K deals in that they include securitisations of multifamily mortgages not originated under Freddie Mac underwriting guidelines, or not purchased by Freddie prior to securitisation. Opus Bank provides financing for affordable multifamily housing in major metropolitan areas on the US West Coast.

"I am extremely excited about our relationship with Freddie Mac. The design and development of this securitisation strategy was a result of great teamwork and tremendous effort by all parties involved. We are pleased to have, together, created a new unique product for the market," says Jason Raefski, svp, head of balance sheet strategies and execution, Opus Bank.

CMBS

CMBS delinquencies climb again

The Trepp US CMBS delinquency rate hit its highest level in 14 months in December. The rate has increased in nine of the last 10 months and is now 5.23%, an increase of 20bp from November.

Last year began with a 102bp drop in the delinquency rate over the first two months, but those early decreases have now been wiped out. At one point in 2016, the rate reflected a year-over-year improvement of 143bp, largely due to the resolution of the US$3bn Stuyvesant Town/Peter Cooper Village loan (SCI passim). Since then, the rate has steadily climbed, as loans from 2006 and 2007 have reached their maturity dates and have not been paid off via refinancing.

The December 2016 rate of 5.23% is 6bp higher than one year previously. The all-time high was 10.34% in July 2012.

"With a cascade of loans from the 2007 vintage coming due in 2017, it is hard to see the rate going down any time in the near future. Many of the stronger performing loans from 2006 and 2007 were either defeased prior to maturity or paid off during their open period. Those that make it to their maturity date tend to be loans with more middling debt service coverage or uncertainty in their rent rolls," notes Trepp.

CMBS

Loss severities down

US CMBS disposition volume last month dropped to US$595.3m across 54 loans, down from November's total of US$671m across 58 loans, according to Trepp. Overall loss severity for December fell by 13bp to 43.05%, due to several large retail notes that were resolved with very minor losses.

Six conduit loans with a combined remaining balance of US$60m suffered losses of 100% or more in December. The US$30.1m Lawrence Shopping Center loan closed out with the highest realised loss for the month, as the note was disposed of with a full write-off (see SCI's CMBS loan events database).

Other noteworthy conduit losses include the US$30.6m Mall at Yuba note and the US$30.2m North Grand Mall. Each of those loans incurred roughly 75% in losses and were backed by REO community shopping centres that featured JCPenney as one of two largest tenants by square-footage.

In terms of loans that paid off with minimal losses, the US$80m Branson Landing and the US$50m A-note portion of the Janss Marketplace were each resolved with less than 2% in losses.

At an average loan size of US$12.4m, 785 loans totalling US$9.7bn paid off last year. Roughly 25% of that liquidated balance comprises loans disposed of in January 2016.

Trepp notes that on an annual basis, the average loss severity climbed to 49.34% in 2016, up from 40.43% in 2015.

CMBS

Student housing CMBS examined

LTV and DSCR metrics weakened marginally for student housing loans securitised in new issue US CMBS in 2016, reports Kroll Bond Rating Agency. CMBS deals have also begun to include more student assets with only limited operating history, while a number of loans provide grounds for concern.

The LTV ratio for student housing has increased for three consecutive years. Kroll reports an LTV of 109.7%, which is the highest among all asset classes and is considerably higher than the 102.4% for traditional multifamily properties.

Student housing also has the lowest DSCR among CMBS asset classes. However, KBRA's IO index decreased for a second consecutive year, falling from 31.0% in 2014 to 19.7% in 2016. The sector's IO index is well below the average of 28.6% for all property types.

The outstanding unpaid principal balance for the outstanding universe of student housing CMBS was US$3.9bn as of the end of 2016, with 237 loan exposures collateralised by 322 properties across 149 CMBS transactions. Of these 237 loans, Kroll identifies nine as loans of concern.

The nine loans of concern have an aggregate UPB of US$134.6m. The largest is a US$32.6m loan collateralised by the recently constructed The Depot, which accounts for 2.4% of the CSAIL 2015-C2 transaction.

The loan was transferred to the special servicer in July 2016 (see SCI's CMBS loan events database). Occupancy for The Depot fell from 94.1% in March 2015 to 58% in December 2015; however, Kroll notes that occupancy rebounded to 70% in August 2016.

The CGCMT 2014-GC25 transaction includes four student housing properties which together account for 14.4% of the UPB. Two of the loans are among the 20 largest student housing exposures, while none of the loans have been identified as loans of concern.

CMBS

Strong apartment NOI growth

Moody's has updated its NOI index for properties backing CMBS conduit loans between 2004 and 2015. The US national all-property NOI composite index surpassed its 2008 peak in 2015 by 1.4%, largely driven by strong apartment performance.

Apartment NOI rose 26% in the five years to end-2015. Core commercial NOI rose 3.1% and all core commercial property sectors, except suburban office, have shown significant improvement from their post-crisis troughs.

Conduit property NOI exceeded pre-crisis peak levels in 2015. National NOI was 1.4% higher in December 2015 than it had been in the September 2008 pre-crisis peak. The 10-year compounded annual growth rate (CAGR) for conduit collateral NOI was 1%.

During the five-year period from 2007 to 2012, the weakest 20% of properties had an average NOI decline of roughly 23%. During the five-year period from 2010 to 2015, the weakest 20% of properties experienced an average NOI decline of about 12%.

Apartment was by far the strongest performing sector within the national all-property NOI index. The apartment NOI 10-year CAGR was 3.1%, significantly above the next best performing sector, CBD office, at 1.3%.

"The core commercial NOI index rose 4.8% since its December 2011 trough, but is still 3.7% shy of its 2008 peak. Retail, industrial and CBD office NOIs have recovered significantly, but suburban office NOI has yet to show much growth above its post-crisis trough level," notes Moody's.

While not part of the composite index, hotels were the most volatile among the major asset classes backing CMBS conduit loans, which the rating agency notes is commensurate with the sector's near daily mark-to-market of room revenue. The high expense ratios of hotels also magnify the impact of revenue changes on NOI.

"Hotel NOI fell roughly 36% from its 2007 peak following the financial crisis, more than double that of any other property type. Conversely, hotel NOI recovered from its 2010 post-crisis trough by 45%, nearly double the pace of any other property type. Despite its the strong recovery, hotel NOI growth has decelerated in recent years," notes Moody's.

CMBS

CMBS credit metrics 'mixed'

US conduit/fusion CMBS credit metrics were mostly steady in the final quarter of 2016, although S&P warns that credit enhancement levels are still too low. Over the entire year, there was some deterioration relative to 2013 and 2014.

There were eight new collateral pools reviewed by S&P in 4Q16, with average DSCR of 1.75x compared to 1.8x in 3Q16. The percentage of IO loans was 60.9% in Q4 (compared to 57.8% in Q3) and exposure to lodging were 15.8% (versus 16.6%).

Loan leverage deteriorated, as the average LTV increased from 90.1% in Q3 to 92.5% in Q4. S&P believes this may have been partially the result of issuers ramping up deal volume in advance of last month's risk retention implementation date (SCI passim).

S&P's average triple-A credit enhancement levels increased marginally to 24.6% in 4Q16, up from 24.4% in the previous quarter. Average triple-B minus levels increased 20bp to 9.9%.

Over 2016 as a whole, S&P analysed 40 conduit/fusion CMBS transaction. The agency's credit metrics deteriorated in some areas compared to 2013 and 2014 vintages, but improved in others.

The weighted average LTV increased to 91.3%, the percentage of lodging properties in preliminary pools is up to 17.3% and the full-term IO percentage increased to 28.0%. Against that, the weighted average DSCR increased to 1.71x and the partial-term IO percentage declined significantly, to 32.6%.

S&P says: "Overall, 2016 credit metrics were mixed in comparison with past years', but we still view the actual subordination levels in most conduit/fusion CMBS transactions as inadequate because those levels remain over 200bp below the levels we consider appropriate at the triple-B minus level, on average. Further, we believe that the pricing spreads year to date on class D (typically triple-B minus by other rating agencies) securities suggest that market participants may not believe that these classes deserve an investment-grade designation either."

Delinquency rates increased in the final quarter of last year and that trend is expected to continue in 2017. The average delinquency rate for CMBS rated by S&P rose to 6.97% in the fourth quarter, which is 23bp higher than the previous quarter's average of 6.74%. The delinquency rate for December 2016 is at 7.33%, which is the highest in the past 35 months. This increase was primarily driven by industrial, office and retail.

Loss severities are also increasing - from 42% in 3Q16 to 42.7% in 4Q16, and from 35.3% for 2015 as a whole to 39.3% for 2016 as a whole. The loss severity for office properties is at its highest level since 2013 and should remain high, as the trends of shared and virtual office spaces increase vacancy rates and the upcoming wall of 2007 CMBS maturities hits.

Insurance-linked securities

Larger cat bonds proliferating

Nearly US$2bn in catastrophe bonds was issued in 4Q16, according to PCS figures. The size of three of the quarter's four transactions exceeded US$200m, indicating a continued trend towards larger cat bonds from experienced sponsors.

The largest issuance of the quarter and of the year was the US$750m Galilei Re deal, which was brought by a privately managed entity (XL Bermuda). The US$500m Ursa Re was the only transaction completed by a publicly managed entity this year (California Earthquake Authority) (see SCI's new issuance database).

There were no cat bond-lite issuances in Q4, although activity for the year was fairly robust. Ten transactions came to the market, representing US$420m in new limit.

Meanwhile, only two cat bonds came from first-time sponsors during 2016: the US$75m First Coast Re (Security First Insurance Company) and US$100m Laerte Re (United Property & Casualty Insurance).

By capital raised, indemnity triggers were most common in 2016, due largely to the size of the transactions that used them.

NPLs

Firm acquires NPL portfolio

Bain Capital Credit has acquired a €364m portfolio of Spanish non-performing loans. It comprises defaulted first lien Spanish loans to hotel operators, real estate developers, retail centres and residential real estate assets.

Fabio Longo, md and head of Bain Capital Credit's European NPL and real estate business, says: "We continue to find Spain one of the most attractive markets in Europe. Our breadth of expertise and capability to execute transactions in a tight timeline is a reflection of our skill-set and capabilities. We see the potential for further investment in Southern Europe, particularly in the real estate and non-performing loan markets."

The transaction was supported by: Copernicus as financial advisor; Aura REE, CBRE, Horwath and Cushman & Wakefield as real estate valuation providers; and Allen & Overy provided legal counsel. It marks Bain Capital's fourth portfolio acquisition in Spain and seventh since 2013.

RMBS

PHH MSR sale agreed

PHH Corporation has agreed to sell its entire portfolio of mortgage servicing rights and related servicing advances, excluding the Ginnie Mae MSRs and related servicing advances that were part of a sale transaction announced last November, to New Residential Investment Corp. Total sale proceeds are expected to be approximately US$912m, with the transaction expected to close in 2Q17.

Of the US$912m, around US$612m is from the sale of MSRs and US$300m is from the sale of servicing advances. The MSR proceeds exclude estimated transaction fees and expenses of approximately 5% of MSR value, and represent a valuation of 84bp on total UPB of US$72bn, as of 31 October 2016.

PHH has also entered into a subservicing agreement with New Residential, pursuant to which PHH will subservice the 480,000 mortgage loans underlying the MSRs to be acquired by New Residential for an initial period of three years, subject to certain termination provisions.

RMBS

Early redemption proposed

Trustees of Arena 2012-I are seeking investor consent for early redemption of the A2 tranche. The bonds were publicly placed and pay a relatively high coupon of three-month Euribor plus 115bp (see SCI's new issuance database).

The offer on the table is a redemption price of 101, according to Rabobank credit analysts. While the original call date of the notes is 17 November 2017, the proposed early redemption date is on or around 24 January.

A quorum of 75% is needed at the noteholder meeting convened on 19 January in Amsterdam. A majority of 75% has to back the proposal in order to proceed with early redemption.

The A1 notes in the Dutch RMBS have amortised in full.

RMBS

Extra ACIS from Freddie Mac

Freddie Mac last month issued one last ACIS transaction of 2016. It was the second ACIS not linked to STACR debt note bonds and attracted a record number of reinsurers.

The ACIS transaction provides up to a combined maximum limit of US$285m of credit losses on single-family loans and transfers a significant portion of mortgage credit risk on a US$16bn reference pool of 15-year mortgages purchased during the first three quarters of 2016. Since the ACIS programme's inception in 2013, Freddie Mac has placed over US$6bn in insurance coverage through 24 ACIS transactions.

"We are pleased with the continued expansion of our broker relationships, which has supported the steady growth of the ACIS program," says Gina Subramonian Healy, credit risk transfer vp, Freddie Mac. "This important network has not only helped us to educate and gain access to new markets, but also strengthen our overall programme."